THE BUSINESS Supply Chain Information Supply and Operations

OLSON
EXPERT PRESS Management Collection
DIGITAL LIBRARIES Technology
M. Johnny Rungtusanatham, Editor
EBOOKS FOR Second Edition
BUSINESS STUDENTS David L. Olson
Curriculum-oriented, born-

Supply Chain
digital books for advanced The rapid growth in computer technology provides
business students, written supply chain managers with valuable tools to better
by academic thought coordinate and control their operations. This book
leaders who translate real-

Information
seeks to describe systems available to give supply
world business experience
into course readings and chains information system support, demonstrating
reference materials for key tasks with demonstrated analytic techniques.

Technology
students expecting to tackle This second edition provides you with newer cases to
management and leadership demonstrate concepts that will allow to better manage
challenges during their
your supply chain management position in one of the
professional careers.

SUPPLY CHAIN INFORMATION TECHNOLOGY

fastest growing fields in our economy.
POLICIES BUILT
BY LIBRARIANS David L. Olson is the James & H.K. Stuart Professor Second Edition
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usage of Nebraska. He has published research in over 150
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• Perpetual access for a tiple objective decision making, information techno-
one-time fee logy, supply chain risk management, and data mining.
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He teaches in the management information systems,
maintenance fees
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The Digital Libraries are a Service Business, Decision Support Systems, and Decision
comprehensive, cost-effective Sciences; and is the co-editor in chief of International
way to deliver practical
David L. Olson
Journal of Services Sciences. He has given over 200 pre-
treatments of important
sentations at international and national conferences
business issues to every
on research topics. He was a Lowry Mays endowed Pro-
student and faculty member.
fessor at Texas A&M University from 1999 to 2001, was
named the Raymond E. Miles Distinguished Scholar
award for 2002, and was a James C. and Rhonda
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Supply and Operations
Management Collection
M. Johnny Rungtusanatham, Editor
ISBN: 978-1-63157-055-1
Supply Chain Information
Technology
Supply Chain Information
Technology
Second Edition

David L. Olson
Supply Chain Information Technology, Second Edition
Copyright © Business Expert Press, LLC, 2014.
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Abstract
The rapid growth in computer technology provides supply chain ­managers
with valuable tools to better coordinate and control their operations. This
book seeks to describe systems available to give supply chains informa-
tion system support, demonstrating key tasks with demonstrated analytic
techniques. This second edition is basically the same as the first edition,
but with newer cases to demonstrate concepts. The target market for this
book is practitioners in the supply chain management field, one of the
fastest growing fields in our economy.

Keywords
advanced planning systems, enterprise resource planning systems, infor-
mation systems, information technology, manufacturing execution sys-
tems, material requirements planning, supply chain management systems,
transportation management systems, warehouse management systems
Contents

Chapter 1 Supply Chain Information Systems.................................1

Chapter 2 Development of ERP and SCM....................................23

Chapter 3 Supply Chain Management Software Option................41

Chapter 4 Business Process Reengineering in Supply Chains.........57

Chapter 5 System Selection...........................................................69

Chapter 6 Supply Chain Software Installation

Project Management.....................................................89

Chapter 7 Recapitulation.............................................................107

Notes�������������������������������������������������������������������������������������������������117
References�������������������������������������������������������������������������������������������119
Index�������������������������������������������������������������������������������������������������123
CHAPTER 1

Supply Chain Information

Systems
The ability to access global production and services has revolutionized
business. Supply chain networks move inventories of various kinds from
source to consumption. Being able to work with producers around the
world provides opportunities to balance low cost with risk mediation.
While logistics usually is associated with moving material, supply chains
today can include intangibles such as services as well as inventories of
goods. Using the Internet enables linking together supply chain networks
in practically any business application, production, or service.
Organizations, such as Dell and Hewlett-Packard, have operated col-
laborative supply chains with each partner focusing on a few key strategic
activities. Supply chains also include organizations, such as the military
and nonprofit organizations like the Red Cross and Red Crescent. In
the retail arena, Wal-Mart has been very successful in the past in linking
thousands of sources with their millions of customers. Organizations such
as Bank of America have viewed their service operations as key to their
success and evaluated their entire service supply chain seeking to apply
the same general principles as lean manufacturing, focusing on provid-
ing maximum value at minimum overall cost. Information systems are
needed to make these supply chains work.

Supply Chain Management

Supply chain management (SCM) became a common term in the 1980s,
heavily influenced by Japanese manufacturing processes like those devel-
oped by Toyota, such as just-in-time (JIT) and lean manufacturing. In
the 1990s electronic data interchange (EDI) made it possible to coordi-
nate chains of organizations worldwide. This enabled the integration of
2 SUPPLY CHAIN INFORMATION TECHNOLOGY

participant ­supply chain elements into cooperative components sharing

information and enabling coordinated planning, operations, and moni-
toring of performance. There was a focus on core competencies, aban-
doning the vertical integration of Standard Oil, U.S. Steel, and Alcoa
and replacing it with linkages of independent organizations specializing
in what they did best. This encompassed the entire product process to
include design, manufacture, distribution, marketing, selling, and ser-
vice. Agile supply chains, such as Motorola and Panasonic, are flexible,
enabling changing the set of partners for given markets, regions, or chan-
nels, accessing the specific price or quality mix that enable organizations
to be competitive.
Original equipment manufacturers (OEMs) shifted from making
products to become brand owners. These brand owners needed to know
what was going on across their entire supply chain, with the need to con-
trol from above rather than from within. Standard Oil in 1900 desired
to control everything from within, seeking to own all elements in their
supply chain. Conversely, Nike doesn’t make shoes anymore. They coor-
dinate activities from design to retail through communication supported
by a variety of information systems linked across their supply chain.

Supply Chain Processes

Collaboration across supply chains requires the integration of all supply
chain activities. This requires a continuous flow of information. Key sup-
ply chain processes include the following:

• Product development
• Procurement to include outsourcing or partnerships
• Manufacturing
• Physical distribution
• Customer relationship management (CRM)

Product development can be obtained by linking customers and suppli-

ers. Customers can express their needs (desires), while the supply chain
organization can contribute what is possible. Communication enables
identification of a product with a competitive life cycle.
Supply Chain Information Systems 3

Procurement (sourcing) involves the selection of supply chain mem-

bers. This can be for specific products or services, so that an organiza-
tion like Wal-Mart might have literally millions of temporary sourcing
arrangements. A stable supply chain will have relationships benefiting all
parties. Outsourcing refers to procuring sources outside the OEM organi-
zation. Outsourcing is broader, however, in that it can refer to obtaining
any part of a tangible product or intangible service. Information systems
can use EDI and web links to communicate rapidly, enabling effective
cost and risk management. Procurement generally involves obtaining
materials and components. Outsourcing enables many opportunities to
develop a more cost-efficient (or lower risk) supply chain. This comes at
the cost of requiring significantly more coordination.
A manufacturing process can be developed based on what the OEM
organization selects as the best combination of cost and risk over the total
product life cycle. Manufacturing processes should be flexible to respond
to changes in market conditions. The activities of planning, schedul-
ing, inventory, transportation, and coordination across the supply chain
require software coordination.
Physical distribution involves moving products (or services) through
the supply chain, ultimately reaching customers. The specific routing is
referred to as a channel in marketing and can include a variety of trans-
portation media to move goods. In a service context, the channel can
involve the routing of who a customer interacts with to get the service
desired.
CRM is the management of the relationships between the providing
organization and its customers. Customer service provides information
from the customers and has the ability to give customers real-time infor-
mation on product availability, price, and delivery.
Linking independent elements to work together to deliver goods and/
or services is flexible and enables rapid change to comply with new cir-
cumstances that are commonly encountered in contemporary business.
By expanding beyond the core organization, a need to monitor perfor-
mance is needed. Some of the key measures of effective SCM include
cost, service, productivity, use of assets, and quality. This is often imple-
mented through monitoring customer perceptions, and identifying best
practices as benchmarks to evaluate supply chain performance.
4 SUPPLY CHAIN INFORMATION TECHNOLOGY

Supply Chain Information Systems

Many software applications are available for each step in the supply chain
process. Many vendors specialize in particular steps supporting part of
any one of the six elements given earlier. Each supply chain organization
will find that they are best served by various combinations of these soft-
ware products. Furthermore, as technology evolves, new software is devel-
oped to serve specific needs as information systems continue to evolve.
A SCM stream can be divided into three main streams: product,
information, and finances.

• Product—Goods moving from sources through manufac-

turing processes and ultimately on to a customer, to include
services such as customer returns.
• Information—Transmitting orders and updating delivery
status.
• Financial—Credit terms, payment schedules, shipment, and
contractual relationships.

Because of advances in manufacturing and distribution systems, the cost

of developing new products and services is dropping and time to market
is decreasing. This has resulted in increasing demand, local and global
competition, and increasing strain on supply chains. SCM software links
suppliers to databases that show forecasts, current inventory, shipping,
or logistics timeframes within the customer organization. By giving this
access to suppliers, they can better meet their customers’ demands. For
example, the supplier can adjust shipping to make certain that their cus-
tomers have the inventory necessary to meet their customers’ needs. They
also can monitor unexpected supply chain disruptions to organize alter-
native routing. Suppliers can download forecasts into their own manufac-
turing systems to automate their internal processes as well.
Planning applications and execution applications are the two primary
types of SCM software:

• Planning applications are capable of generating improved plans

through use of mathematical algorithms.
Supply Chain Information Systems 5

• Execution applications enable tracing goods, managing materi-

als, and exchanging financial information.

A number of supply chain systems have evolved over the decades. The
first was materials requirements planning (MRP). This was extended to
include planning schedules (often labeled MRP-II). Enterprise resource
planning (ERP) systems seek to integrate all organizational information
systems, although of course companies will always have special needs out-
side of an ERP. Nonetheless, ERP systems support much of supply chain
activity, to include financial transactions with sources and customers,
inventory dealings with sources, forecasting to support planning, MRP
to support assembly operations, and many other activities. The trend is
for many functions that used to be outside the ERP to be offered as mod-
ules within ERP. One case in point is advanced planning system (APS)
software. There also have been systems marketed as warehouse manage-
ment systems (WMSs), transportation management systems (TMSs),
manufacturing execution systems (MESs), and the more general logistics
management systems, targeted for specific industries such as the military
and/or construction. The 21st century has seen a continued expansion of
ERP systems to include additional functionality, such as CRM and SCM
systems as part of the enterprise information system (EIS). There also are
other uses of information technology available to support supply chains,
such as online marketplaces.

Materials Requirements Planning

The term MRP is used as a general term to include all MRP versions,
namely, MRP-I (i.e., materials requirements planning), Closed-loop
MRP (i.e., MRP-I with capacity planning and shop floor management),
and MRP-II (i.e., Closed-loop MRP integrated with the other functions
such as finance and marketing).1 The concept of an integrated informa-
tion system took shape on the factory floor. Manufacturing software
developed during the 1960s and 1970s, evolving from simple inventory
tracking systems to MRP software. MRP at its core is a time-phased order
release system that schedules and releases manufacturing work orders and
purchase orders, so that subassemblies and components are available at
6 SUPPLY CHAIN INFORMATION TECHNOLOGY

the assembly station when they are required. Some of the benefits of MRP
are reduction of inventories, improved customer service, and enhanced
efficiency and effectiveness. MRP software allows a plant manager to
plan production and raw materials requirements by working backward
from the sales forecast, the prediction of future sales. Thus, the manager
first looks at marketing and sales forecasts of demand (what the customer
wants), the production schedule needed to meet that demand, calculates
the raw materials needed to meet production, and projects raw mate-
rials purchase orders to suppliers. For a company with many products,
raw materials, and shared production resources, this kind of projection is
impossible without a computer to keep track of various inputs.
EDI, the direct computer-to-computer exchange of standard business
documents, allows companies to handle the purchasing process electroni-
cally, avoiding the cost and delays resulting from paper purchase order
and invoice systems. SCM began with the sharing of long-range produc-
tion schedules between manufacturers and their suppliers.
The MRP system should provide four basic items of information:
when to place order, how much to order, who to order from, and when
the items need to be on hand. MRP systems are used to acquire or fabri-
cate component quantities on time for both internal purposes and sales
and distribution. MRP is a planning instrument geared exclusively to
assembly operations. Each manufacturing unit informs its suppliers what
parts it needs and when it requires them. The main aim for the evolution
of MRP was to tackle the problem of dependent demand, that is, deter-
mining how many of a particular component is required knowing the
number of finished products.
The next stage of MRP-II evolution was JIT methodology in the late
1980s. MRP-II (manufacturing resource planning) is a method to plan all
resources for a manufacturer. A variety of business functions are tied into
MRP-II systems, including order processing as in MRP, business planning,
sales and operations planning, production plans, master production sched-
uling, capacity requirements planning, and capacity planning. MRP-II
systems are integrated with accounting and finance subsystems to produce
reports including business plans, shipping budgets, inventory projections,
and purchase plans. A major purpose of MRP-II is to integrate primary
functions (i.e., production, marketing, and finance) and other functions,
Supply Chain Information Systems 7

such as personnel, engineering, and purchasing into the planning process,

to improve the efficiency of the manufacturing enterprise.
Many within the operations management field consider ERP as a nat-
ural extension of MRP-II. The APICS Association for Operations Man-
agement definition for ERP is a method for the effective planning and
control of all resources needed to take, make, ship, and account for cus-
tomer orders.2 There is at least some truth to this view, but ERP systems
are even more comprehensive than simply on manufacturing operations.
ERP systems are found in practically all types of large organizations, to
include chemical facilities and even universities. MRP-II functions are
covered by production planning and other ERP modules.

Advanced Planning Systems

Computer technology makes it possible for improvements at both the cost

and value ends of the supply chain. Demand uncertainties can be better
managed through improved inventory demand forecasting, reduction of
inventories, and improved transportation costs through the optimization of
coordinated activities across the supply chain. APSs provide decision sup-
port by using operational data to analyze material flows throughout the sup-
ply chain. This supports the business functions of purchasing, production,
and distribution through the entire spectrum of planning. Purchasing is sup-
ported by planning and MRP . Production is supported by strategic, mas-
ter, and production planning as well as short-term scheduling. Distribution
is supported by distribution planning and transportation planning. These
planning systems interact, enabling the management of demand across the
supply chain. A recent list of APS products includes the following:

• Adexa
• i2
• JDA (acquired Manugistics)
• Logility
• Webplan (Kinaxis)

In addition, each major ERP software has options to support advanced

planning through modules. APSs use historical demand data as the
8 SUPPLY CHAIN INFORMATION TECHNOLOGY

basis of forecasts that are used to manage future demand. However, in

order to optimize systems, a certain level of stability is required. John D.
Rockefeller was able to manipulate demand for petroleum products over
100 years ago, obtaining the stability he needed. Demand manipulation
is still possible in some markets today but is much more difficult. The
idea of supply chain optimization is more difficult to implement in con-
ditions of constant product innovation, highly volatile global demand,
and increased product customization (such as applied by Dell and other
computer vendors allowing customers to custom design their computer
systems online). This turbulent market environment makes it difficult to
obtain extensive pertinent demand history. It is easy to collect data, but
demand changes too rapidly to take advantage of it for extended periods
of time.

Warehouse Management Systems

WMSs provide the functionality of tracking parts throughout a supply

chain. Systems such as HighJump Software and RedPrairie Corp (now part
of JDA Software Group’s supply chain management product line) offer
tools using electronic input such as bar code scanning to track material
through the supply chain system, maintaining accurate information flow
to parallel physical flow. Radio-frequency identification (RFID) technol-
ogy provides another form of electronic data input to WMSs. The example
case at the end of the chapter provides some idea of what WMSs do.

Manufacturing Execution Systems

MESs appeared in the mid-1990s, evolving as all other supply chain

information technology. Original focus was to manage demand on man-
ufacturing organizations with respect to quality, standards, cost reduc-
tion, schedule, and ability to react to change. With time, functions have
emphasized support traceability. MES functionality now integrates sup-
port to most manufacturing execution processes from release of produc-
tion orders to finished goods delivery. MES also triggers supply chain
replenishment upstream (telling sources that replenishment inventory is
needed). These systems use a common user interface and data system to
Supply Chain Information Systems 9

integrate support to multiple locations or organizations within a supply

chain. An MES offers the following functionalities:

• Scheduling
• Process management
• Document control
• Data collection or acquisition
• Labor management
• Quality management
• Production unit dispatch
• Maintenance management
• Product tracking
• Performance analysis
• Resource allocation and tracking

An MES can interact between the organizational ERP and the shop
floor, taking production orders from the ERP and allocating machines
and labor to tasks or products. Real status from the shop floor in turn is
passed on to the ERP to update resource availability, track products and
inventory, and record production. Logistics functions in the ERP include
plant production scheduling, shipping, and inventory. The MES trans-
lates that to execution in the form of dispatching, detailed production
scheduling, and tracking material.

Transportation Management Systems

TMSs provide software support at an affordable level to control shipping.

A variety of alternative sources are available to increase visibility and gen-
erate more efficient solutions to move material in an increasingly complex
environment involving many risks (piracy, war, regulations). Functional-
ity provided includes transportation mode planning, optimization mod-
els, and workflow management.3
TMS software can be obtained from vendors, some of whom are listed
here:4

• Accuship
• EPICOR
10 SUPPLY CHAIN INFORMATION TECHNOLOGY

• HighJump (acquired Pinnacle)

• IBM (acquired Sterling Commerce and others)
• Infor
• JDA (acquired Manugistics)
• UPS Logistics Technologies

This list does not include the full-scale ERP vendors, such as Oracle and
SAP , who also have TMS functionality. The list demonstrates the volatility
of the industry, showing a number of acquisitions (and not showing a num-
ber of other acquisitions of TMS vendors that have been acquired). Other
means of TMS acquisition include in-house development, hosting by an
ASP, or software as a service. Firms also have options with respect to software
within specific branches of the organization, or enterprise-wide support.

Enterprise resource Planning

In the early 1970s, business computing relied on centralized mainframe

computer systems. Today, it is reported that 80 percent of Fortune
500 firms use ERP systems to manage operations.5 These systems proved
their value by providing a systematic way to measure what businesses did
financially. The reports these systems delivered could be used for the anal-
ysis of variance with budgets and plans, and served as a place to archive
business data. Computing provided a way to keep records much more
accurately, and on a massively larger scale than was possible through man-
ual means. But from our perspective at the beginning of the 21st century,
that level of computer support was primitive.
Business computing systems were initially applied to those func-
tions that were easiest to automate, and that called for the greatest levels
of consistency and accuracy. Payroll and accounting functions were an
obvious initial application. Computers can be programmed to gener-
ate accurate paychecks, considering tax and overtime regulations of any
degree of complexity. They also can implement accounting systems for
tax, cost, and other purposes because these functional applications tend
to have precise rules that cover almost every case, so that computers can
be entrusted to automatically and rapidly take care of everything related
to these functions.
Supply Chain Information Systems 11

Prior to 2000, ERP systems catered to very large firms, who could
afford the rather high costs of purchasing ERP systems. Even focusing on
a selected few modules would typically cost firms $5 million and up for
software. After 2000, demand dropped, in part because firms were often
concerned with Y2K issues prior to 2000, which motivated many ERP
system acquisitions. Demand noticeably dropped off after 2000 came
and went. Vendors reacted in a number of ways. First, the market con-
solidated, with Oracle purchasing PeopleSoft (who had earlier acquired
JD Edwards). Microsoft acquired a number of smaller ERP software
products, consolidating them into Microsoft Dynamics, which caters to
a smaller priced market, thus serving a needed gap in ERP coverage for
small businesses. Notably, SAP advertises that they can serve small busi-
ness too. But it appears that they are more valuable in the large-scale
enterprise market. There, in addition, are many other systems to include
open sourced ERP systems (at least for acquisition) like Compiere in
France. Many countries, such as China, India, and others, have thriv-
ing markets for ERP systems designed specifically for local conditions,
although SAP and Oracle have customers all over the globe.
Enterprise information systems (EIS) is appearing as a term for the
addition of what used to be independent add-on software such as SCM
systems and CRM to the core ERP . This trend manifested itself ­initially
when Oracle purchased Siebel Systems, the leading CRM provider. SAP
responded by acquiring their own CRM, and both vendors have added
SCM functionality within their systems as well. The difference between
ERP and EIS is primarily marketing semantics, so we will use ERP for
both older and newer versions. One trend among ERP vendors is to
expand their functionality to provide services formerly supplied by supply
chain vendors such as Manugistics and i2 Technologies.6 SAP has intro-
duced mySAP.com, which is open collaborative system integrating SAP
and non-SAP software. SAP APO supports supply chain activities, such
as forecasting, scheduling, and other logistics-related activities. ­PeopleSoft
has Enterprise Performance Management to support decisions at many
levels. JD Edwards products have support for planning and execution.
Oracle’s 11i advanced planning and scheduling system was designed to
automate customer, supplier, and firm interactions. Vendors are moving
toward greater integration of ­supply chain products.
12 SUPPLY CHAIN INFORMATION TECHNOLOGY

The ERP concept is not applied merely for the manufacturing envi-
ronment but for all kinds of enterprises. Early ERP systems focused on
manufacturing, although they quickly expanded to support all sorts of
organizations. ERP facilitates enterprise-wide integrated information sys-
tems covering all functional areas and performs core corporate activities
and enlarges customer service. ERP is a business management system that
seeks to combine all aspects of the organization. It is capable of taking
care of planning, manufacturing, sales, and marketing. The concept is
to integrate legacy systems within a coordinated integrated system. Typi-
cally, an ERP system uses database systems, which are integrated with
each other.
Common ERP Features: An ERP system is not merely the integration
of diverse enterprise processes mentioned earlier but also can possess key
characteristics to meet the requirements. Features often found in an ERP
include the following:

• Best business practices—Incorporation of processes evaluated as

the best in the world
• Comprehensive—Integrating as many business computing
functions as possible, with a single database
• Modular—An open system architecture allowing incorpora-
tion of those modules needed for the organization
• Flexible—Capable of response to changing enterprise needs,
to include Open DataBase Connectivity
• External linkage—Capable of linking external organizations,
especially within supply chains

Among the many reasons to adopt an ERP, they offer an integrated

system shared by all users rather than a diverse set of computer appli-
cations, which can rarely communicate with each other, and with
each having its own set of data and files. ERP provides a means to
coordinate information system assets and information flows across the
organization. The main benefit is the elimination of suborganizational
silos that focus on their own problems rather than serving the interests
of the overall organization. On the downside, ERP systems impose
one procedure for the entire organization, which requires everyone
Supply Chain Information Systems 13

to conform to the new s­ ystem. ERP systems are thus less flexible. But
the benefits of integration are usually much greater than the costs of
conformity.
Data can be entered once, at the most accurate source, so that all
users share the same data. This can be very beneficial because shared data
is used more and by more people, which leads to much more complete
and accurate data. As errors are encountered, users demand corrections,
but this is limited because a set of procedures are needed to insure that
changes do not introduce new errors. This makes it harder to make cor-
rections, but again, this added inconvenience is usually well worth the
gains of data integration.
ERP systems also can provide better ways of doing things. This idea is
the essence of best practices, a key SAP system component. The downside
to best practices is that they take a great deal of effort in identifying the
best way to proceed with specific business functions, and that they often
can involve significant change in how organizational members do their
work. Further, as with any theory, what is considered best by one is often
not considered best by all.
ERP systems are usually adopted with the expectation that they are
going to yield lower computing costs in the long run. Ideally, adopting
one common way of doing things is simpler and involves less effort to
provide computing support to an organization. In practice, ­savings are
often not realized, due to failure to anticipate all the detailed nuances of
user needs, as well as the inevitable changes in the business ­environment
that call for different best practices and computer system relationships.
Training needs are typically under-budgeted in ERP projects. Further-
more, these training budgets don’t usually include the hidden costs of
lost productivity as employees cope with complex new systems. Table 1.1
recaps these pros and cons of ERP systems.
The key rationales for implementing ERP systems are:

• Technology—More powerful, integrated computer systems

with greater flexibility and lower IT cost.
• Business practices—Implementation of better ways of accom-
plishing tasks yielding better operational quality and greater
productivity.
14 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 1.1  ERP Pros and Cons7

Factor Pro Con
System integration Improved understanding Less flexibility
across users
Data integration Greater accuracy Harder to make corrections
Best practices More efficient methods Imposition of how people do their work
Less freedom and creativity
Cost of computing More efficient system Changing needs
planned Under-budgeted training expense
Hidden costs of implementation

• Strategy—Cost advantages can be gained through more

efficient systems leading to improved decision making, more
business growth, and better external linkages.
• Competitive advantage—If an organization’s competitors
adopt ERP and gain cost efficiencies as well as serve custom-
ers better, organizations will be left with declining clientele,
competitive advantage will also arise from providing better
customer service.

The motivations for ERP adoption were examined by three studies

using the same format. Mabert et al. (2000) surveyed over 400 Midwest-
ern U.S. manufacturing organizations about ERP adoption. Olhager
and Selldin (2003) replicated that study with 190 manufacturing firms
in Sweden. Katerattanakul et al. (2006) again replicated the survey, this
time in Korea. These studies reported the following ratings with respect
to motivation for implementing ERP (see Table 1.2).
Initially, the fear of Y2K was a major concern. The Swedish survey was
later than the one in the United States and that might explain the lower
rating for this item in the Swedish study. The later Korean study did not
ask about this dated issue. The U.S. response was actually neutral (only
slightly higher than 3), but Y2K clearly was a factor in ERP adoption in
the mid- to late-1990s. However, more important reasons were always
present. In the first two studies, replacing legacy systems received a high
positive response. The desire to simplify and standardize systems had the
Supply Chain Information Systems 15

Table 1.2  Reasons for implementing enterprise resource planning 8

United
Reason States Sweden Korea
Replace legacy systems 4.06 4.11 3.42
Simplify and standardize systems 3.85 3.67 3.88
Improve interactions with suppliers and 3.55 3.16 3.45
customers
Gain strategic advantage 3.46 3.18 3.63
Link to global activities 3.17 2.85 3.54
Solve the Y2K problem 3.08 2.48 NA
Pressure to keep up with competitors 2.99 2.48 2.94
Ease of upgrading systems 2.91 2.96 3.55
Restructure organization 2.58 2.70 3.33

Note: Rating scale from 1 (not important) to 5 (very important).

Source: Extracted from Mabert, Soni, and Venkataramanan (2000), Olhager and Selldin (2003),
Katerattanakul, Hong, and Lee (2006).

second highest rating in the first two studies and had the highest rating in
the later Korean study.
There were two other reasons that received relatively high ratings in
the United States (a bit lower in Sweden). These were to improve interac-
tions with suppliers and customers, which is one way to gain strategic
advantage. The supply chain aspects of ERP have led vendors to modify
their products to be more open, although work is needed in this direction
(and seems to be proceeding). Linking to global activities was slightly
positive in the U.S. survey, more negative in the Swedish study, and rela-
tively higher in the Korean study.
Three other potential reasons received low ratings in both studies.
Pressure to keep up with competitors received neutral support in the U.S.
study. The ease of upgrading systems is a technical reason that received
neutral support both in the United States and in Sweden. Restructuring
the organization was rated lower.
From these studies, we infer that ERP systems are an important means
to upgrade the quality of information systems. They can provide organ-
izations with coordinated systems that have higher-quality data. Once
the kinks are worked out, this information may be available in a more
16 SUPPLY CHAIN INFORMATION TECHNOLOGY

r­ esponsive way. Not all evidence indicates lower costs, but most evidence
does indicate higher-quality information systems.
ERP and SCM: Originally ERP tools were not considered for SCM
and thus, the information flow between various members of the supply
chain was slow. This was because until the late 1990s the concentration of
organizations was on improving the internal efficiency alone. Organiza-
tions, however, soon realized that although internal efficiency is impor-
tant, its benefit would be limited unless complemented by increased
efficiency across the supply chain. They also realized that, accurate flow
of real-time information across the supply chain was the key to success in
the emerging business climate, which was characterized by rapid advances
in technology, shorter product life cycles, and so forth. Therefore, organi-
zations started integrating ERP applications with SCM software. This
ensures that efficiency was achieved across the supply chain, including a
seamless flow of information. ERP became a vital link in the integrated
supply chain as it serves as the integrated planning and control system.
In summary, ERP applications help in effectively delivering SCM in
the following ways:

• Data sharing: They can create opportunities to share data

across supply chain members, which can help managers in
making better decisions. They also make available wider
scope to supply chain managers by providing access to much
broader information.
• Real-time information: ERP systems can provide real-time
information, which can be of great help in supply chain deci-
sions. For example, ordering raw materials can be based on
the inventory details provided by the ERP systems.

Web-based technologies have revolutionized the way business is con-

ducted and SCM and ERP are no exceptions. In order to leverage the
benefits offered by this new technology enabler, ERP systems are being
web-enabled. The Internet allows linking websites to back-end systems
like ERP and providing connections to host of external parties. The ben-
efits of such a system are that customers have direct access to the supplier’s
ERP system and the vendors in turn can provide real-time information
Supply Chain Information Systems 17

about inventory, pricing, order, and shipping status. The Internet, thus,
provides an interface between ERP system and the supply chain members
allowing real-time flow of reliable and consistent information. To illus-
trate a benefit of web-enabling ERP, such a facility allows customers to go
online and configure their own products and get price information and
immediately get to know whether the configured product is in stock or
not. This is made possible because the customers’ request directly access
the ERP systems of the suppliers.

WMS using RFID9

Warehousing is a component of most supply chains, storing inventory until
it is moved to the next stage. Warehousing operations include inventory
storage, order product mixing, cross docking, and customer service. Within
inventory management the specific tasks of storage and retrieval and inven-
tory control are tasks of importance. A number of WMS software vendors
are in the market, offering tools to manage warehouse operations. Current
technology such as RFID is often incorporated within these systems.
Wang et al.10 reported the implementation of a digital warehouse man-
agement system (DWMS) using RFID. This application was in China,
applied specifically to managing the supply chain of tobacco, which has
a much larger market in China than in the United States. The user was
the Wuhan Tobacco Corporation, which had over 100 warehouses stor-
ing thousands of different products. The RFID-DWMS reported was
installed in a distribution center warehouse. This DWMS consisted of
four components: a digital shelf manager, a reader adapter, a storage
or retrieval manager, and an event processor manager. Implementation
involved the following six stages:

1. Warehouse process analysis was the first step. The Chinese government
required that all tobacco products have a barcode that communicated
with a government database. The warehouse operation involved the
receipt of new products, a storage assignment made by an operator
relying on experience, and the transportation of the item to its des-
ignated storage location. When products were distributed from the
warehouse, two operators scanned the barcode as items left and a
18 SUPPLY CHAIN INFORMATION TECHNOLOGY

quality control person monitored the results to ensure that barcode

information was correct. At the end of each day, a manual inven-
tory of products in the warehouse was conducted. A business process
reengineering analysis was conducted to recommend improvements
to this set of processes.
2. Requirements analysis evolved from interviews with warehouse man-
agers and operators. Warehouse managers needed more racks for
storage capacity and RFID tags to store barcode information and
enable improved operations. They also had to maintain operator
records and needed a visual display of all warehouse information and
current inventory reports. The requirements of warehouse operators
were an automatic assignment of storage or retrieval actions, a guide
map to show them where they had to go, and an alert if an operation
did the wrong thing.
3. Warehouse layout design was accomplished to most efficiently lay out
drive-in racks. Forklift crashes were minimized by fixing RFID read-
ers in the receiving space linked with the DESM software. Data col-
lection and tag writing were performed by a barcode scanner and
RFID reader at the same time. When forklifts passed a second reader
in the warehouse, data were collected in real time. This required
RFIDs with readability at a distance. Forklifts had a touch-screen
computer linked to the DWMS database.
4. System design included a human resources management subsystem
for personnel. It also included stock-in and stock-out subsystems to
maintain real-time inventory data. A digital shelf map gave the man-
ager a visual view of all warehouse inventory with statistical report
capabilities.
5. Forklift guidance was driven by the touch-screen computer on each
forklift. Retrieval was driven using last-in-first-out. Operators were
given guide maps to make it easy to see locations.
6. Rule management gave a rules maintenance platform that allowed
addition, modification, and deletion to the rulebase. Priorities for
storage and retrieval could also be specified.

Implementation involved some issues. Barcode data needed to

be compressed into a new data format. A digital pallet held 30 boxes.
Supply Chain Information Systems 19

Barcode data included a 32-digit number containing company name,

production area, date, and specification, as well as a serial number to
uniquely identify each box. A system was applied to provide a check to
obtain data reliability. Additionally, both storage and retrieval operations
were reengineered for efficiency.
The RFID-DWMS improved operations in four ways:

1. Inventory was visualized.

2. Storage/retrieval assignment was automated.
3. Forklifts were automatically guided.
4. Loading time was reduced.

The system reduced required manpower by half. Average loading time was
cut from 50 minutes to 18 minutes. Loading and unloading efficiency
was improved, and finally, inventory accuracy was increased from 80 to
99 percent. Thus, the WMS was highly successful. Wang et al. gave the
following lessons learned:

• Top management support is the most important factor in

successful implementation.
• A prototype system for testing is needed for expensive innova-
tive technology.
• The type of RFID technology used needs to be carefully
selected, trading off cost and functionality needed.
• The decision to tag items or pallets is important, again trading
off cost for detailed accuracy.
• Systems should be designed to be as flexible as possible.

Conclusion
In the past, vertical integration was a way to gain efficiency in supply
chains. Today, vertical integration doesn’t work as well, because specialty
organizations have developed to perform specific tasks very efficiently.
Efficiency is gained today through supply chains linking specialists
throughout the vertical business hierarchy.
20 SUPPLY CHAIN INFORMATION TECHNOLOGY

A number of software systems are available to support supply chains.

This chapter reviewed MRP, APS, and ERP. Online market place soft-
ware was briefly described as an example of other software support. ERP
systems were initially focused on integrating internal operations. Their
high investment cost and often rigid procedures made them barriers to
effective supply chain linkage. However, recent trends show movement
toward more open systems that allow closer coordination across supply
chains. One way to accomplish this efficiency would be through all ele-
ments in a supply chain adopting the same ERP vendor products, as well
as software enhancements. However, this is not economically viable for
most supply chain components. Many suppliers may not have the mil-
lions necessary to invest in technology adopted by the core company in
the supply chain.
Other approaches are toward open ERP software. APSs were originally
developed to enhance the ability of firms to deal with other organizations
in their supply chain. More recently, the trend among ERP vendors is
to provide this functionality within their products, especially through
Internet technology. Lean manufacturing is another philosophy related
to gaining efficiency in production operations. While the concepts of lean
manufacturing initially seem in conflict with the idea of ERP, there have
been imaginative developments allowing ERP systems to support lean
manufacturing.
ERP deployment, management, and evolution are significant opera-
tional concerns in today’s cost-conscious business climate. The perfor-
mance of enterprise applications designed to streamline ERP processes
and operations is dependent on the fundamental network infrastructure.
Companies should take a holistic view of their mission, critical applica-
tions, and networking environments and include best-in-class network-
ing solutions.
Enterprises have long made flamboyant statements about getting
closer to their customers and streamlining operations. ERP, CRM, and
SCM applications and the organizations implementing them are in part,
bringing teeth to those superior intentions. It is not a trouble-free pro-
cess, however. In reality, the highly publicized failures of these initiatives
have in some minds brought concern about these applications and their
possible benefits. However, more and more organizations are moving
Supply Chain Information Systems 21

ahead with these initiatives, and the successful organizations will gain
from higher margins, better customer relations, and improved back-office
operations.
The core idea of ERP is complete integration of an organization’s
computing system. Despite obvious advantages to vendors of each adopt-
ing organization installing the entire suite of modules offered, however,
only about half of the implementations seem to be of this nature. It is very
common for organizations to select only a few of the available modules,
which makes great sense because not every organization needs every mod-
ule vendors develop. In fact, vendors seem to recognize this through their
recent emphasis on products tailored to specific industry.
Organizations may have other very important reasons to implement
ERP products differently than the vendors’ design. A very important one
is that full system implementation is very expensive. By selecting particu-
lar modules, organizations can cut initial implementation costs signifi-
cantly. Although vendors might argue that in the long run this might be
ineffective than full implementation now, in practice information systems
projects rarely go as planned, nor do they tend to stay within originally
planned budgets. Thus, organizations reduce risk greatly by trying par-
ticular modules first, often seeing how the new system is digested by the
organization, before plunging to additional modules.
There is also a difference in the difficulty of implementing different
modules. Financial and accounting modules are typically installed first,
as they involve the most structured application. This makes it easier to
implement, and easier for the organization to digest. Other modules such
as materials management and planning also tend to work well. Con-
versely, support to less structured environments, such as sales and mar-
keting, tend to be more problematic.

Outline of the Book

Chapter 1 introduces various information systems available to support
supply chain operations. Chapter 2 describes the key supply chain process
of MRP and its relationship to ERP systems. Chapter 3 further elaborates
the ERP options, to include APS as an available module or as a stan-
dalone system. Chapter 4 discusses the relationship of business process
22 SUPPLY CHAIN INFORMATION TECHNOLOGY

reengineering with these integrated systems. Chapter 5 presents a system-

atic selection technique. Chapter 6 describes the issues in implementing
such systems, along with the demonstration of project management in
the supply chain software context. Chapter 7 summarizes three issues in
implementing these systems.
CHAPTER 2

Development of ERP
and SCM
Effective supply chain operations require efficient collaboration across
supply chain elements (distributors, manufacturers, suppliers) through
sharing key information for coordination. This is usually accomplished
through software tools, such as advanced planning systems (APSs) or
linked enterprise resource planning systems (ERPs). Wal-Mart has
been very effective in operating at a global level by requiring sources to
have SAP systems to link to their ERPs.1 Dell has developed a profit-
able supply chain niche in the computer field, not by making comput-
ers, but rather through using a made-to-order e-business, relying on a
global supply chain for the parts they assemble.2 They are only two of
many supply chain organizations that have prospered through reen-
gineering operations enabling them to successfully compete. Supply
chains don’t have to be private organizations. The U.S. Department
of Defense uses software to coordinate logistics for its activities. Even
nonprofit organizations like the Red Cross coordinate their supply
chains with software support.
As we stated in Chapter 1, supply chain management systems began
with materials requirements planning (MRP). These systems provided a
rational way for assembly manufacturers to control their inventories. This
was extended in the 1980s to what was labeled MRP-II. Parallel to that,
SAP developed their ERP system, centered on accounting and financial
functions. SAP continues to conduct extensive research on best practices
for standard business functions and incorporates the knowledge gained
into their evolving enterprise resource planning (ERP) product. ERP was
especially attractive to manufacturing firms, and MRP inventory man-
agement and shop-floor scheduling and planning were early functions
supported by SAP’s ERP systems. In the past decade, more effective APSs
24 SUPPLY CHAIN INFORMATION TECHNOLOGY

have evolved to enable better decision support and control of materials

flows, often in conjunction with ERP systems.

ERP Modules
ERP systems in concept cover all computing for an organization. The idea
is to centralize data and computation, so that data can be entered once in
a clean form and then be used by everyone in the organization (even by
supply chain partners outside the organization) with the confidence that
the data are correct. However, in practice, ERP vendors sold their software
in modules. Modules allow clients to save money by reducing the number
of components licensed, focusing on the most important functions first.
ERP vendors have recently focused on offering systems tailored to spe-
cific clients, such as aerospace, insurance, or medical operations. Table 2.1
gives a list of SAP modules around 2,000 (extracted from Brady et al.3).
Other vendors have parallel sets of modules, as demonstrated in Table 2.2.
This information was extracted from vendor websites like www.oracle.
com. As with any current website, content is subject to change.
Module MM covers the functions of MRP . MRP began as an inven-
tory reordering tool in operations involving dependent demand (the
demand for materials that are necessary to create the final product). The
capability of MRP systems evolved to support planning of all company
resources and currently can support business planning, production plan-
ning, purchasing, inventory control, shop floor control, cost manage-
ment, capacity planning, and logistics management. The use of MRP
resulted in better inventory and raw materials control, reduced need for
clerical support, and reduced lead times in obtaining materials. Improved
communication and better integration of planning were also gained.

Relative Module Use

Business computing systems were initially applied to those functions that
were easiest to automate and that called for the greatest levels of con-
sistency and accuracy. Payroll and accounting functions were an obvi-
ous initial application. Computers can be programed to generate accurate
paychecks, considering tax and overtime regulations of any degree of
Development of ERP and SCM 25

Table 2.1  Modules

SAP Description Oracle
SD Sales and distribution: records sales orders and Marketing
scheduled deliveries, customer information Sales
Supply chain
MM Materials management: purchasing and raw Procurement
materials inventory, work-in-process, finished
goods
PP Production planning: production planning and Manufacturing
scheduling, actual production
QM Quality management: product inspections,
material certifications, quality control
PM Plant maintenance: preventive maintenance, Service
resource management
HR Human resources: recruiting, hiring, training, Human resources
payroll, benefits
FI Financial accounting: general ledger account Financials
transactions, generates financial statements
CO Controlling: internal management, cost analysis
by cost center
AM Asset management: fixed-asset purchase and Asset management
depreciation
PS Project system: R&D, construction, marketing Projects
projects, SAP R/3 implementation
WF Workflow: automated R/3, task-flow analysis, Contracts
prompt actions
IS Industry solutions: best practices

Source: Vendor websites, 2005.

complexity. They also can implement accounting systems for tax, cost,
and other purposes because these functional applications tend to have
precise rules that cover almost every case, so that computers can be
entrusted to automatically and rapidly take care of everything related to
these functions.
The degree of module use was reported by Mabert et al. and replicated
by Olhager and Selldin.4 Mabert et al. surveyed 479 ERP users from the
American Inventory and Inventory Control Society in the Midwestern
United States in the 1990s. Olhager and Selldin patterned their study
26 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 2.2  Relative ERP module use

Use—Midwestern
Module United States Use—Sweden
Financial and accounting 91.5% 87.3%
Materials management 89.2% 91.8%
Production planning 88.5% 90.5%
Order entry 87.7% 92.4%
Purchasing 86.9% 93.0%
Financial control 81.5% 82.3%
Distribution/logistics 75.4% 84.8%
Asset management 57.7% 63.3%
Quality management 44.6% 47.5%
Personnel/human resources 44.6% 57.6%
Maintenance 40.8% 44.3%
R&D management 30.8% 34.2%

Source: Based on Mabert et al. (2000); Olhager and Selldin (2003).

after Mabert et al. using 190 Swedish manufacturing firms. Table 2.2
presents information extracted from that study. In Table 2.2, those pro-
portions over 90 percent and under 50 percent are italicized for emphasis.
The most popular module in the United States was financial and
accounting, which is the most obvious application needed by an organi-
zation. The Swedish study indicated that materials management, produc-
tion planning, order entry, and purchasing modules were just as popular.
Other modules, given at the bottom of Table 2.2 and each with adop-
tion rates less than 50 percent, are either not considered as critical or
involve less specificity in best practices. These are similar for both stud-
ies, although human resources modules were slightly more popular in
Sweden. There have been noted differences in the ease in which differ-
ent modules are implemented. All financial modules tend to be relatively
easy to implement. Those modules relating to manufacturing and human
resources also have been implemented with notable success. On the other
hand, modules supporting less-structured activities, such as sales and
marketing, have encountered notable implementation difficulty. There-
fore, one reason to implement ERP in modules is because of the relative
need for components of the overall system.
Development of ERP and SCM 27

Another (and probably the compelling) reason is cost. Full ERP sys-
tems cost a reported $5 million for very small versions to over $100 mil-
lion for very large implementations. The fewer modules implemented, the
lower the cost. Additionally, it sometimes makes sense to implement the
system in bits (phased implementation) rather than try to bring the entire
massive system online at one time (Big Bang implementation). Therefore,
rolling out an ERP by module sometimes makes sense as well. For a num-
ber of reasons, ERP in practice is usually implemented by module.

Variants in Types of ERP Systems

Often firms will apply the concept of best-of-breed, mixing modules from
different vendors. The Mabert et al. study found that a single ERP pack-
age was utilized as the vendor designed in only 40 percent (56 percent in
Sweden) of the over 400 respondents to their survey. The most common
strategic approach in the United States (50 percent, as opposed to 30
percent in Sweden) was to supplement a single ERP package. In fewer
cases, the idea of best-of-breed was applied (4 percent in both studies).
As might be expected by the enormity of the undertaking, few of the
surveyed implementations were entirely constructed in-house (less than
1 percent in the United States, 2 percent in Sweden).
The idea of best-of-breed approaches is to take advantages of what
is perceived as specific vendor relative advantage in particular areas of
application. One vendor’s human resource module might be used, in con-
junction with another vendor’s financial and accounting system, and yet a
third vendor’s materials management modules. In 1999, Honeywell and
AlliedSignal were merged, and the best approaches of each firm’s exist-
ing ERP systems were examined, with those components judged to be
superior retained in the merged firm.5 Quite often third-party software
designed to integrate software applications from several vendors (mid-
dleware) is needed. The role of middleware products is to enable cross-
platform operating system communications. This means that software
applications such as e-commerce, data warehouses, customer relationship
management, supply chain software, and other enhancements can be
added to ERP systems. Middleware also allows connection of best-of-
breed modules to the ERP backbone.
28 SUPPLY CHAIN INFORMATION TECHNOLOGY

If a firm chooses to utilize their own methods within an ERP, Dav-

enport gave the choice between rewriting the code internally and using
the existing system with interfaces.6 Both approaches add time and cost
to implementation and thus would dilute the integration benefits of the
ERP. The more customization made to an ERP, the less ability to com-
municate seamlessly within system components and across supplier and
customer systems. However, the trade-off is that much less change in
employee work processes is necessary. Therefore, customization reduces
the hidden costs of learning the new system by employees (the human
side), while increasing the burden on the IT staff. Not customizing makes
it much easier on the IT staff but makes employees work much harder to
adapt their work to the new system.
Another important concept is the idea of federalization. Davenport
used this term to describe the process of rolling out different versions
of an ERP system in each regional unit, tailoring each location’s system
to accommodate local operating practices.7 Hewlett-Packard, Monsanto,
and Nestle have all used this approach, establishing a common core of
ERP modules shared by all units but allowing other modules to be oper-
ated and controlled locally.
Because of its focus on a key function of supply chain management,
we will describe the basic MRP process in greater detail. (Specific com-
mercial software may differ in details.)

Materials Requirements Planning

The MRP system begins with three documents. A forecast for end items
being assembled is needed by time period. A bill of materials (BOM)
describes the components that go into an assembled product. It lists each
part in a hierarchical tree, by quantities required for each subassembly,
all the way up to the final end item. Finally, inventory records describing
quantities of each component on hand is needed, as well as managerially
determined ordering policies with vendors and lead times.
We use a small example to demonstrate the basic workings of MRP,
one of the most important supply chain management processes. MRP
begins with a master production schedule showing the requirements for
output from the manufacturing facility by time unit (Table 2.3). A second
Development of ERP and SCM 29

Table 2.3  Master production schedule

Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Sedans 40 30 30 30 25 25 25 25 20 20 20 15 20 15 15 10 10 10 10 10
Roadsters 15 18 17 13 15 16 14 14 13 13 11 9 10 9 8 7 6 6 6 5
Towncars 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
SUVs 60 30 29 29 26 25 24 24 23 23 23 22 22 21 21 20 20 19 18 18

Table 2.4  Inventory and purchasing information

Initial Order Lead
Item on hand conditions time On order
Assembled small engine 150 1 day
Assembled large engine 15 1 day
Assembled wheels 1200 1 day
Assembled doors 1000 1 day
Engine–small 100 Each 3 days
Engine–large 40 Each 4 days
Chassis–Sedan 80 Each 2 days
Chassis–Roadster 50 Each 2 days 30 in Day 2
Chassis–Towncar 30 Each 3 days 20 in Day 2,
10 in Day 3
Chassis–SUV 80 Each 3 days 20 in Day 1,
30 in Day 3
Battery 173 Multiples of 12 2 days
Wheel 1000 200 minimum 2 days
Windshield 250 50 minimum 2 days
Door 1200 Multiples of 400 1 day
Hood 150 50 minimum 1 day
Rim 200 Multiples of 200 2 days
Tire 300 Multiples of 144 1 day
Lock 112 Multiples of 1000 1 day
Handle 332 576 minimum 2 days
Window 138 50 minimum 1 day

component of the system is inventory and purchasing information, which

shows the initial quantity on hand by item, order conditions, lead times,
and currently open orders (Table 2.4). Additional inventory information
such as safety stocks could also be included. BOMs show the hierarchy of
30 SUPPLY CHAIN INFORMATION TECHNOLOGY

Assemble
Sedan
1 day

Assemble
engine
1 day

Chassis— Assemble Windshield Hood

Assemble doors
Sedan (1) wheels (4) (1) (1)
(4)1 day
1 day

Door (1) Lock (1) Handle (1) Window (1)

Engine
Battery (1)
small (1)

Rim (1) Wheel (1) Tire (1)

Figure 2.1  BOM for sedans

components required to manufacture each end-item and subcomponent

(Figures 2.1 through 2.4).
Assume an automobile company produces four types of automobile.
They use a rolling 20-day planning horizon.
Vehicles are assembled with the appropriate chassis, engine, wheels,
windshield, and doors. Assembly of vehicles takes one day. Materials are
received ready for use at the beginning of the day (lead time includes
unpacking and preparation).
Engines, wheels, and doors are subassemblies. Each of these subas-
semblies takes one day.

• When an engine is received, a battery is inserted to make an

assembled engine.
• When a wheel is received, a rim and tire are added, making an
assembled wheel.
• When a door is received, a lock, handle, and window are
added, making an assembled door.
Development of ERP and SCM 31

Assemble
Roadster
1 day

Assemble
engine
1 day

Chassis— Assemble Windshield Assemble doors Hood

Roadster (1) wheels (4) (1) (2) 1 day (1)
1 day

Door (1) Lock (1) Handle (1) Window (1)

Engine
small (1) Battery (1)

Rim (1) Wheel (1) Tire (1)

Figure 2.2  BOM for roadsters

Assemble
Towncar
1 day

Assemble
engine
1 day

Chassis— Assemble Windshield Hood

Assemble doors
Towncar (1) wheels (4) (1) (1)
(4)1 day
1 day

Door (1) Lock (1) Handle (1) Window (1)

Engine
Battery (1)
large (1)

Rim (1) Wheel (1) Tire (1)

Figure 2.3  BOM for towncars

32 SUPPLY CHAIN INFORMATION TECHNOLOGY

Assemble
SUV
1 day

Assemble
engine
1 day

Chassis SUV Assemble Windshield Assemble doors Hood

(1) wheels (4) (1) (4)1 day (1)
1 day

Door (1) Lock (1) Handle (1) Window (1)

Engine
Battery (1)
small (1)

Rim (1) Wheel (1) Tire (1)

Figure 2.4  BOM for SUVs

Parts needed at the beginning of each day for assembly of each vehicle
are shown in Table 2.5.
Requirements can be aggregated across all vehicles (Table 2.6).
The MRP analysis for each of these elements can then be conducted.
For instance, for small engines (Table 2.7).
This tells the assembly operation that 43 small engines need to be
assembled on Day 1. The MRP analysis is conducted in each time period,
or daily, because there might be many changes in demand, receipts, or
inventory on hand. The only action taken is for Day 1. If, as is the case here,
items are ordered lot-for-lot (L4L in inventory code), the rest of the time
period data can be calculated and treated as a forecast of future demands.
However, as we will demonstrate, if ordering complications arise (orders
come in multiples of some value or with some minimum order), they will
become scheduled receipts in subsequent analyses. You can’t update this
particular day’s MRP form, because that will create a cycle. (This little
problem can be solved in many ways, but for our purposes it is sufficient
to treat MRP as a time-period by time-period calculation.)
Development of ERP and SCM 33

Table 2.5  Top-level quantities required

Day Day Day Day Day Day Day Day Day Day
Assemble Sedan 1 2 3 4 5 6 7 8 9 10
Small engine assembly 1 ea 40 30 30 30 25 25 25 25 20 20
Chassis–Sedan 1 ea 40 30 30 30 25 25 25 25 20 20
Wheel assembly 4 ea 160 120 120 120 100 100 100 100 80 80
Windshield 1 ea 40 30 30 30 25 25 25 25 20 20
Door assembly 4 ea 160 120 120 120 100 100 100 100 80 80
Hood 1 ea 40 30 30 30 25 25 25 25 20 20

Day Day Day Day Day Day Day Day Day Day
Assemble Roadster 1 2 3 4 5 6 7 8 9 10
Small engine assembly 1 ea 15 18 17 13 15 16 14 14 13 13
Chassis–Roadster 1 ea 15 18 17 13 15 16 14 14 13 13
Wheel assembly 4 ea 60 72 68 52 60 64 56 56 52 52
Windshield 1 ea 15 18 17 13 15 16 14 14 13 13
Door assembly 2 ea 30 36 34 26 30 32 28 28 26 26
Hood 1 ea 15 18 17 13 15 16 14 14 13 13

Day Day Day Day Day Day Day Day Day Day
Assemble Towncar 1 2 3 4 5 6 7 8 9 10
Large engine assembly 1 ea 10 10 10 10 10 10 10 10 10 10
Chassis–Towncar 1 ea 10 10 10 10 10 10 10 10 10 10
Wheel assembly 4 ea 40 40 40 40 40 40 40 40 40 40
Windshield 1 ea 10 10 10 10 10 10 10 10 10 10
Door assembly 4 ea 40 40 40 40 40 40 40 40 40 40
Hood 1 ea 10 10 10 10 10 10 10 10 10 10

Day Day Day Day Day Day Day Day Day Day
Assemble SUV 1 2 3 4 5 6 7 8 9 10
Small engine assembly 1 ea 60 30 29 29 26 25 24 24 23 23
Chassis–SUV 1 ea 60 30 29 29 26 25 24 24 23 23
Wheel assembly 4 ea 240 120 116 116 104 100 96 96 92 92
Windshield 1 ea 60 30 29 29 26 25 24 24 23 23
Door assembly 4 ea 240 120 116 116 104 100 96 96 92 92
Hood 1 ea 60 30 29 29 26 25 24 24 23 23
34 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 2.6  Aggregated part requirements

Day Day Day Day Day Day Day Day Day Day
1 2 3 4 5 6 7 8 9 10
Assembled small engine 1 ea 115 78 76 72 66 66 63 63 56 56
Assembled large engine 1 ea 10 10 10 10 10 10 10 10 10 10
Chassis–Sedan 1 ea 40 30 30 30 25 25 25 25 20 20
Chassis–Roadster 1 ea 15 18 17 13 15 16 14 14 13 13
Chassis–Towncar 1 ea 10 10 10 10 10 10 10 10 10 10
Chassis–SUV 1 ea 60 30 29 29 26 25 24 24 23 23
Assembled wheels 1 ea 500 352 344 328 304 304 292 292 264 264
Windshield 1 ea 125 88 86 82 76 76 73 73 66 66
Assembled doors 1 ea 470 316 310 302 274 272 264 264 238 238
Hood 1 ea 125 88 86 82 76 76 73 73 66 66

Table 2.7  Small engine MRP worksheet for day 1

Assembled small Order Day Day Day Day Day Day Day Day Day Day
engine info 1 2 3 4 5 6 7 8 9 10
Gross Requirements 115 78 76 72 66 66 63 63 56 56
Scheduled receipts
On Hand 150 35
Net requirements L4L 43 76 72 66 66 63 63 56 56
Planned order release 1 day 43 76 72 66 66 63 63 56 56 –
lead

Table 2.8  Large engine MRP worksheet for day 1

Assembled large Order Day Day Day Day Day Day Day Day Day Day
engine info 1 2 3 4 5 6 7 8 9 10
Gross requirements 10 10 10 10 10 10 10 10 10 10
Scheduled receipts
On hand 15 5
Net requirements L4L 5 10 10 10 10 10 10 10 10
Planned order release 1 day 5 10 10 10 10 10 10 10 10 –
lead

The schedule for assembling large engines is outlined in Table 2.8.

Plant management needs to know that five large engines need to be
assembled on Day 1.
Development of ERP and SCM 35

Table 2.9  MRP worksheets for engines

Order Day Day Day Day Day Day Day Day Day Day
Engine–small info 1 2 3 4 5 6 7 8 9 10
Gross requirements 43 76 72 66 66 63 63 56 56 –
Scheduled receipts
On hand 100 57
Net requirements L4L 19 72 66 66 63 63 56 56 –
Planned order release 3 day 66 66 63 63 56 56 – – – –
lead

Order Day Day Day Day Day Day Day Day Day Day
Engine–large info 1 2 3 4 5 6 7 8 9 10
Gross requirements 5 10 10 10 10 10 10 10 10 –
Scheduled receipts
On hand 40 35 25 15 5
Net requirements L4L 5 10 10 10 10 –
Planned order release 4 day 5 10 10 10 10 – – – – –
lead

Knowing the planned order release for assembled small engines and
assembled large engines now allows us to proceed down the BOMs to
identify subcomponents that need to be ordered. Assembled small
engines consist of one engine–small and one battery, while assembled
large engines consist of one engine–large and one battery. The planned
order release for the higher-level component becomes the gross require-
ment for the subcomponents (multiplied by the number each). Table 2.9
gives the worksheet for both small and large engines:
Here we have a serious problem. In practice, in order to operate, the
firm needs to obtain an emergency supply of 19 small engines by the
beginning of Day 2 and another 72 for the beginning of Day 3. This
would almost inevitably involve extra expense.
The planned order release for Day 1 is the action item, identifying the
need to place an order. Other day planned order releases will await more
current information tomorrow.
36 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 2.10  MRP worksheet for batteries

Order Day Day Day Day Day Day Day Day Day Day
Batteries info 1 2 3 4 5 6 7 8 9 10
Gross requirements 48 86 82 76 76 73 73 66 66 –
Scheduled receipts
On hand 173 125 39
Net requirements X12 43 76 76 73 73 66 66 –
Planned order release 2 day 48
lead

The number of batteries to order depends on the demand for both

engines. The sum of planned order releases for both small and large
engines becomes the gross requirements for batteries (Table 2.10).
Here the cycling complication can be demonstrated. The batteries on
hand will cover demand through Day 2, and all but 43 required on Day 3.
A two-day lead time means that orders must be placed in Day 1 to cover
at least 43 batteries. However, batteries have to be ordered by the dozen.
One dozen (12 batteries) would be insufficient. Therefore, four dozen (48
batteries) are ordered. On the next day’s MRP form, these 48 batteries
would show up as scheduled receipts on what is now Day 3. At that time,
this will cover the demand for batteries for that day, and we can see than
5 of these batteries will be carried forward to what is now Day 4, leaving
a net requirement of (76 − 5 = 71) 71 batteries, which will in turn trigger
an order for 72 batteries (the nearest dozen covering 71). Therefore, we
will only worry about planned order releases for the current day.

Advance Planning Systems

APS to aid supply chain material flows have been developed.8 They can
be obtained independently from an ERP, added on to an ERP, or found
as modules within an ERP. Major ERP vendors have added APS modules.
These systems offer support to meet the need to quickly and efficiently
plan and control supply chains in dynamic environments. The consider
resource capacities and can handle multiple sites and transportation links,
offering near-optimal plans over the entire supply chain, and have the
ability to identify bottlenecks. APSs may include modules to support:
Development of ERP and SCM 37

• supply network design through demand planning;

• supply chain planning (SCP) to include purchasing and mate-
rials planning;
• demand management and forecasting;
• production planning and scheduling;
• distribution and transportation planning; and
• execution to include order release, shop floor control, vehicle
dispatch, and order management.

APSs have been credited with enabling planners to better visualize

what they could make given constraints for specific operations, ranging
from shop-floor conditions to warehousing constraints and transporta-
tion system limits under conditions of specific demand requirements.
They have enabled much more efficient service in meeting changing
customer demand under conditions of rapidly changing prices. APSs
enable changing plans rapidly, providing what-if analysis to change
product mix.
Industry cases demonstrate conditions under which APSs have pros-
pered and when they have failed.9 The more uncertainty in the process,
the greater the challenge of keeping human participation needed to make
the systems work. Human interaction was found to be needed, as relying
on autonomous APSs has led to problems.
The following case demonstrates some of what an APS does, and how
it can enable better management of a supply chain.

APSs in Swedish Seed Distribution10

The Swedish Farmers Supply and Crop Marketing Association is a pro-
ducer cooperative providing marketing, distribution, sales, processing,
and supply to about 30,000 farmers in Sweden. Prior to 2001, Swedish
farmers relied on local and regional cooperatives for seed supplies. These
were merged into the association in 2001 into 13 geographic areas to
provide farmers with seed, fertilizers, feed, and other required materi-
als. The association also sells what is produced. They have about 13,000
employees and market food to 19 countries.
38 SUPPLY CHAIN INFORMATION TECHNOLOGY

Supply
Production Distribution Customers
30,000
4 plants 2 centers 30,000 farmers
farmers

Figure 2.5  Association seed supply chain

The association handles the entire seed supply chain, beginning with
cleansing raw seed before packing and distribution, and deals with 270
items (including different package sizes), delivering about 4,000 tons of
seed a week during the planting season.
A major restructuring of the seed supply chain was conducted in 2004.
Two of six production plants were closed, along with two of four central
warehouses. This resulted in lower production and storage ­capacity, thus
increasing requirements on the transportation system. The association
supply chain consisted is illustrated in Figure 2.5.
The association controlled production and storage facilities. Transpor-
tation was outsourced but needed assignment information with about
2 weeks of lead time.
A Lawson M3 SCP system was implemented in 2004. The system
was viewed as a decision support system. The system balanced supply
and demand for each weekly time period during the planning horizon
(the remainder of the planting season). This is similar to the MRP plan-
ning horizon. Input data were forecasts (as in MRP); customer orders
(realized demands); raw material available (inventory data); and capacities
in terms of production, warehouse storage, and transportation. Forecasts
were generated by the annual budget and were only updated twice per
year. Actual customer orders were used for the first 2 weeks of the plan-
ning horizon. Capacity and raw material data were obtained from the
association’s ERP system and fed into the Lawson M3 SCP system. Pro-
duction and inventory levels were matched with capacity for each period,
considering the four production and two warehouse facilities. Linear and
mixed-integer programming was used by the M3 SCP to minimize cost
over the overall supply chain system, with simulations conducted based
on the generated solutions.
A four-phase iterative planning system was used. In the first phase,
an unconstrained master plan was established to see where resources were
Development of ERP and SCM 39

overloaded. This would be much the same as the MRP system described
earlier. The second phase took this output and reran the system add-
ing constrained production, especially for seed cleansing and packaging
capacities considering minimum batch sizes to avoid expensive start-ups.
This yielded a plan for the number of shifts required at each produc-
tion facilities. The third phase added limits on warehouse capacities, and
new solutions were generated. To this point, unlimited transportation
capacity was assumed. The fourth and final phase added transportation
constraints.
Use of the system streamlined production and distribution. Total costs
were decreased about 13 percent annually despite increasing the quantity
of goods sold. A more precise measure of value added was a reduction
of total cost per ton by about 15 percent. The use of the APS resulted in
increased production batch sizes because production was centralized to
four rather than six plants. Transportation costs increased slightly because
more direct distribution was used, adding to overall system efficiency.
Less capital was required for inventory due to better system throughput.
Total planning time was reduced through the APS, with increased control
of material flows.

Conclusion
A variety of types of software are available to support supply chain man-
agement. The most important functions are forecasting, planning, and
control of materiel throughout the system. MRP is a system designed to
take forecasts and use them to control materiel in assembly operations. It
requires a relatively stable operating environment in order to be effective
(lots of change in actual demand versus forecasted demand causes negates
many of the benefits of reduced inventory).
APSs are focused on supply chain activities of forecasting, sourcing,
and monitoring inventory. As such, they deal with the key processes
related to supply chains only. They can be obtained standalone, added-on
to an ERP from an outside vendor; or obtained as a module within an
ERP, at least from the larger ERP vendors.
ERP systems are rarely obtained with all available modules. Not every
organization needs every module vendors have available. Even if a client
40 SUPPLY CHAIN INFORMATION TECHNOLOGY

might be able to use some particular module, they may not find it cost-
effective and can reduce their ERP licensing and maintenance costs by
eliminating marginally effective modules. The module system makes it
possible to tailor ERP systems to particular organizational needs.
One of the most important modules for manufacturing involves MRP
functionality. As with APS, MRP software can be obtained stand-alone,
added on to an ERP from an outside vendor, or obtained as a module
within an ERP.
While having the ability to choose specific modules provides flexibil-
ity, it also complicates matters. Chapter 3 discusses optional forms of
supply chain information system support in greater detail.
CHAPTER 3

Supply Chain Management

Software Options
In the past, organizations typically developed their own software using
their own in-house programmers and staff. This led to development of
many useful but diverse and unconnected legacy systems. During the past
few decades, many software vendors have focused on developing soft-
ware for specific applications, creating many specific software products, to
include materials requirements planning (MRP) systems, advanced plan-
ning systems (APS), and enterprise requirements planning (ERP) systems.
Therefore, the software field has evolved from each organization creating
its own software to a vendor system selling off-the-shelf packages. An even
later development has been open-source software (OSS) products.

Options
There are many approaches to provide information systems to support
supply chains. The most well known are SAP and Oracle. There are many
other commercial vendors as well. And commercial vendor software is by
no means the only source of software to manage supply chains. There are
application service providers (ASPs), and organizations can develop their
own systems in-house (although as we will stress, this involves a lot of
work). The primary categories of options to obtain supply chain support
are the following:

• A custom system developed in-house

• A standalone APS
• A full vendor ERP system
• Selected vendor modules
• A customized vendor ERP system
42 SUPPLY CHAIN INFORMATION TECHNOLOGY

• A best-of-breed approach
• ASPs
• An open-source system

Customized Systems Developed In-House

The traditional (and very much outdated) approach is to develop software

using only in-house assets. This approach does offer the greatest opportu-
nity to gain competitive advantage. However, creating in-house software
on this scale is a very difficult information systems project. Developing
a strong APS in-house calls for hiring a great deal of expertise that can-
not hope to compete with vendors specializing in a particular software
product. The ideal way to develop an integrated system is to combine it
with extensive business process reengineering (which we will discuss in
Chapter 4), identify the best way to do everything, and then build the
computer system to accomplish this. This is a very slow and expensive
way to obtain supply chain software. Yet this approach is the most flexible
and responsive to organizational needs.

Standalone APSs

Standalone APS software was presented in Chapter 2 and is widely avail-

able. This will be quite a bit less costly than a vendor ERP system but
will only provide specific planning support for supply chain operations.
It would make a great deal of sense to integrate an APS with financial,
accounting, and other organizational computing. This integration is the
essence of an ERP system.
The simplest option (and by far the most expensive) is to adopt a full
vendor ERP product. This is the option that vendors will suggest, and it
has some strong advantages, especially with respect to relative time and
installation.

Full Vendor ERP Systems

SAP and Oracle have become world leaders in software, both offering
very powerful systems capable of supporting multinational o­ rganizations.
Supply Chain Management Software Options 43

However, they are expensive. While SAP and Oracle contend to offer
products suitable to small business organizations, they really aren’t inter-
ested in talking to organizations without multimillion-dollar annual
information system budgets. There also are many hidden costs, includ-
ing heavy consulting fees, annual maintenance contracts, unexpectedly
large training costs, and complications from changing how employees
do their jobs.
There are many competitive vendors to SAP and Oracle. One nota-
ble vendor is Microsoft, offering Great Plains ERP software at a price
clearly targeted to reach intermediate-sized organizations (with annual
information system budgets around a million dollars). Additionally, there
are many other smaller vendors, making the vendor choice for small-
to intermediate-sized organizations very interesting (and complicated).
Generally, you pay for what you get. However, not everyone needs the
computing power suitable for Exxon.

Selected Vendor Modules

Compromise systems are available. Most firms adopt only a few modules
of vendor software. This is a partial form of an ERP system, which has
the relative advantages of minimizing organizational risk and expenditure
in the short run and minimizing the trauma of incorporating the ERP
system into organizational operations. The disadvantage is that the full
functionality of the vendor system is not obtained, and users still must
conform to the procedures that the vendor programmed into the system.

Customized Vendor ERP Systems

Many companies adopt another hybrid approach, customizing a vendor

software product. This gains flexibility over simply adopting the vendor
system but risks loss of the efficiencies built into the system through best
practices. This approach has the advantage of retaining core company
competencies, or methods that the organization does very well, along
with some of the advantages of integrated systems. There is much less
negative impact on how employees do their jobs. However, it makes the
IT staff work much harder and spend a great deal more money.
44 SUPPLY CHAIN INFORMATION TECHNOLOGY

Best-of-Breed Approaches

The best-of-breed approach is similar to selecting a few vendor modules.

Each vendor has developed a reputation for some specific ERP function.
Modules considered to be competitively strong are selected from multiple
vendors. Dial, a manufacturer of soap and other products, at one time
had a mix of applications from Siebel, Oracle, Manugistics, and other
sources.1 Using the best-of-breed approach, custom interfaces can be
developed using in-house information system development assets. Over-
all, however, it usually creates more trouble than it’s worth.

Application Service Providers

You can in effect rent an ERP system through an ASP. This is a form of
outsourcing. Dial reorganized its IT and installed an SAP suite run by
Electronic Data Systems (EDS) to replace Dial’s 50 IT employees, who
were to be transferred to EDS after an 18-month, $35 million project.
Only a small governance team was retained by Dial, with the purpose of
dealing with IT strategy, architecture, and industry applications. Overall
expenses for the transfer were expected to be $110 million. Outsourcing
is attractive to many types of organizations but especially to those that
have small IT staffs, without expertise in enterprise systems. The primary
benefit of an ASP is that the using organization doesn’t have to worry
about system development, nor about being at the mercy of vendors when
they make changes to their software. Some organizations, such as General
Motors, have outsourced all their IT operations.2 However, the risk is sim-
ply transferred, because the user is now subject to the mercy of the ASP.
The decision is very similar to that of deciding to buy or rent housing. In
the long run, you are usually better off buying a house. However, the cash-
flow impact and risk avoidance of renting is much better than buying.

Open-Source ERP Systems

Another major development in ERP has been open software systems.

The open software idea was made famous by the Linux operating system.
There are many nuances to definitions, but we will use the term open
Supply Chain Management Software Options 45

source for software distributed without charge. A related idea is software

as a service (SaaS), involving web distribution of bits of software capable
of doing particular functions, at a fee. OSS provides the opportunity to
utilize more service-oriented systems, strongly supported by organiza-
tions such as IBM with their on-demand computing initiative and an
industry focus on SaaS, where vendors develop software posted to the web
and made available for customer use. Web delivery has been selected as
a means to distribute a number of interesting enterprise system software,
led by Compiere from France. Compiere and many similar products are
not open source in the sense that users can modify the code. They are
open in the sense that they are downloadable for free. The business model
is based on collecting fees for service and support.
The first six means of obtaining supply chain software support listed
so far are fairly traditional. We will elaborate a bit on two relatively unique
approaches: outsourcing and open source.

Outsourcing Supply Chain Management Software

There are risks in outsourcing. In many cases, costs rise precipitously after
the outsourcing firm has become committed to the relationship. These
tradeoffs are recapitulated in Table 3.1.
One risk is that an ASP might shirk its commitments due to bank-
ruptcy or for other reasons. ASP sites might also be attacked and van-
dalized, or destroyed by natural disasters. Each organization must
balance these factors and make their own decisions. The case studies
in this chapter demonstrate how two organizations reached different
conclusions.
ERP is only one service offered through ASPs. Acquisition of supply chain
management systems such as an APS through an ASP often makes sense.

Open-Source Supply Chain Software

Open-source development has proven highly successful in general soft-
ware product development. Red Hat claims that OSS can save businesses
money by:
46 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 3.1  Factors for and against outsourcing

Reasons to outsource Reasons against outsourcing
Reduced capital expenditure for software Security and privacy concerns
and updates
Lower costs gained through application Concern about vendor dependency and
service provider (ASP) and economies of lock-in
scale (efficiency)
More flexible and agile IT capability Availability, performance, and reliability
concerns
Increased service levels at reasonable cost High migration costs
Expertise availability unaffordable Expertise is a competency critical to
in-house (eliminate the need to recruit IT organizational success
personnel)
Allowing the organization to focus on Systems are inextricably tied to IT
their core business infrastructure
Continuous access to the latest technology Some key applications may be in-house
and critical
Reduced risk of infrastructure failure Operations are currently as efficient as the
ASPs
Manage IT workload variability Corporate culture doesn’t deal well with
working with partners
Replace obsolete systems

Sources: Adapted from Bryson and Sullivan (2003); “ERP outsourcing” (2003); Clymer (2004);
Olson (2004).

1. enabling use of commodity hardware rather than proprietary machines;

2. avoiding expensive maintenance contracts;
3. obtaining greater functionality, reliability, and performance;
4. increasing productivity through a faster learning curve and availabil-
ity of support tools;
5. avoiding vendor lock-in; and
6. reducing the need for specialized security consultants and tools.

OSS is thus becoming a viable alternative to proprietary software,

with an obvious cost advantage. There are risks, in that one cannot
expect the same level of service with OSS as with proprietary alternatives.
Supply Chain Management Software Options 47

However, support for many OSS products is available, from such organ-
izations as IBM and Red Hat. Contemporary software selection thus
requires considering the tradeoffs between open-source and proprietary
software. Open-source ERP products include Compiere, OpenMFG,
Open For Business Project, Tiny ERP, Open Office, and OpenPro, each
providing various levels of enterprise information system (EIS) func-
tionality in various forms of open-source relationships. The open-source
project center Sourceforge.net had over 1,000 ERP projects ongoing as
of May 7, 2009.
ERP systems have evolved to expansion of functionality, espe-
cially in the form of customer relationship management and supply
chain support, to a transformed product often referred to as EISs as
discussed in Chapter 1. Recently, ERP vendors have realized that
open-source systems have capabilities, both as a source of content
for vendors and as a threat to the proprietary enterprise system mar-
ket share from competitors based on OSS development or delivery.
Open-source ERP products can provide flexibility and of course have
the advantage of free software access. As ERPs are commonly imple-
mented by organizations, it is hard to attain competitive advantage
through implementation of an ERP product. OSS ERP systems can
be an answer for competitive advantages as organizations are able
to customize their information systems by modifying the open soft-
ware codes. Three potential benefits in using OSS ERP systems are
increased adaptability, decreased reliance on a single supplier, and
reduced costs.

Comparison of Supply Chain Management

Software Sources
Table 3.2 compares advantages and disadvantages of some representative
points on a continuum.
We will conclude this chapter with a case study of a small organi-
zation’s experience in obtaining inexpensive software support for their
made-to-order planning operation.
48 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 3.2  Advantages and disadvantages of alternative software

sources
Method Advantages Disadvantages
Customized systems Best fit with organizational Most difficult to develop
developed in-house needs Most expensive
Slowest
Standalone advanced Less expenditure Harder to integrate with
planning systems Much simpler installation other applications

Full vendor enterprise Relatively fast Inflexible

requirements planning Less expensive than Make employees change
(ERP) products customization work methods
Efficient from an IT
perspective
Easier to upgrade
Selected vendor modules Less risk If expanding, long run time
Relatively fast and higher costs

Least expensive vendor

approach
Customized vendor ERP Retain flexibility while Slower
systems keeping vendor expertise Usually more expensive
Best-of-breed approach Theoretically gain best of Difficult to link modules
all systems Slow
Need middleware
Application service Least risk At the mercy of application
providers service provider
Least cost No control
Fastest Subject to price increases
Least subject to vendor
change
Open-source systems COST! (acquisition is free) Greatest risk (other than
Flexible in-house)
Need employees with
ability to link open-source
systems
Supply Chain Management Software Options 49

Implementation of an Open-Source Enterprise

Requirements Planning System
WETI (fictitious name of a real firm) is a small enterprise that manu-
factures industrial automated welding systems for several industries.
As the client base expanded the required inventory to service the many
uniquely engineered-to-order systems expanded as well. Customer ser-
vice for repair and replacement parts also became a large part of daily
operations. Demand for systems increased, the number of engineers
grew, and the subsequent paper trail exploded. There was a need for a
system to manage orders, scheduling, billing, and inventory.

Business Case: First Round

Company production increased 500 percent in the first two years and
steadily increased at about 20 percent each year thereafter. Early in
2003, it was recognized that the old way of keeping track of sales,
parts, and documentation was not adequate to keep up with the
demand of its customers. They began to explore several information
systems, including but not limited to the following:

• in-house development
• high-cost vendor software enterprise requirements plan-
ning (ERP) systems
• low-cost vendor systems
• off-the-shelf software such as QuickBooks and Microsoft
Office Suite

In-house development was an option, considering the company’s

experience in software engineering, but the limiting factor that pre-
vented development was time and manpower. Several midmarket
ERP software providers were considered, such as Microsoft Great
Plains, Sage software, and Infor ERP Visual. After several months
of moving through the typical sales routine, proposals were given to
WETI, and based on the average implementation cost of $60,000,
all were rejected. The owners felt that at that price it would be worth
50 SUPPLY CHAIN INFORMATION TECHNOLOGY

reconsidering in-house development. Both owners had come from

larger companies and had seen some of the horrors of vendor ERP
implementation. They felt that the high cost was not justified or
worth the headache of drastically conforming to a system that would
lock them into ongoing support and maintenance costs for the life of
the software, as is typical of traditional ERP software vendors.

First Round Choice: ERPlite

The employee in charge of finding a software solution examined low-
cost ERP systems available at that time. ERPlite (http://www.erplite.
com) was selected. The price per user was around $300 at the time,
which was drastically lower than the prices offered by the traditional
ERP vendors. Furthermore, the software seemed that it would meet
many of the requirements needed for their ERP system, to include
e-business, inventory and MRP, and accounting.
At the price and perceived functionality the decision to move for-
ward with ERPlite was easy for the owners to accept. The risks seemed
very manageable, and if the system failed to deliver the loss would
be minimal. In mid-2004, three user seats were purchased, with the
intent to buy more once the basics were in place and functioning well.
The three seats were installed, and everything worked well for a cou-
ple of months. Testing went smoothly, but regardless some limitations
were discovered. The processing of work orders for the volume of work
that WETI was experiencing not only took a long time to compile, but
also created an overwhelming amount of paper trail.

Tradeoffs
As the ERPlite system was altered to accommodate WETI’s unique
problems, it became more difficult for ERPlite staff to provide effective
over-the-phone support, but not due to their lack of effort. Within a
year WETI decided to forgo monthly support and decided it would
pay on a per-instance basis if further support were needed. Along with
the cancellation of monthly support, they no longer would receive bug
Supply Chain Management Software Options 51

fixes or patches created by ERPlite. Within 18 months of installation

the head of the manufacturing staff decided that the work order sys-
tem was not adequate to keep up with their requirements, and they
stopped using the official work order system.

Results: First Round

Four years later the only functional aspects of ERPlite being used were
the purchasing module and sales quotes module. Purchasing would
use the stored product numbers, its preferred supplier, and the most
recent purchase price to generate purchase orders. Historical purchase
orders were stored in the database and could be accessed for historical
changes in price or to list a set of purchased products associated with
a particular project or product build. Sales would use the system to
determine a sales price based on a standard markup of the purchase
price. The items could be added to a sales quote and sent via fax or
e-mail to a customer. It should be noted that sales quotes were only
used for spare and placement parts only, not for entire systems sales.
Purchase orders and sales quote were generated and then printed to
provide accounting with the information necessary to generate a check
from accounts payable or an invoice from accounts receivable within
QuickBooks. This duplication of effort was common in many areas of
WETI’s daily business operations.

Round Two: Midmarket ERP Vendors Versus

Open-Source ERP
The business case in this round proceeded much as in the first round.
This time, however, those in charge of finding the replacement for
ERPlite started with low-cost solutions first, looking at programs such
as DBA Manufacturing (htttp://www.dbamanufacturing.com) and
Fishbowl Inventory (http://www.fishbowlinventory.com). These low-
cost solutions were tested through free trials, and while robust and
very functional, there were concerns voiced over some key limitations
regarding WETI’s mode of operations.
52 SUPPLY CHAIN INFORMATION TECHNOLOGY

Alternatives Considered
Over the period of 3 months, several ERP vendors were evaluated
including but not limited to the following:

• Sage AccPac
• Epicor
• Made2Manage
• E2 Shop System
• Exact JobBoss
• Infor Global’s Visual
• M1 by Bowen and Groves (now ECi M1)

The selection was narrowed to Visual and M1. They both seemed to
offer a comprehensive solution for an engineer-to-order or made-to-
order manufacturing operation. After another couple of months of
demonstrations with various employees of WETI and more impor-
tantly with the owners, it was decided to call for proposals for a 10-user
system with on-site implementation support and training for several
end users. The bids ranged from $18,000 to about $42,000 with
approximately an additional $5,000 to $8,000 expense on a dedicated
server and SQL database software. The owners balked at the price, and
it was quickly realized on all sides that the owners had no intention of
purchasing a system at that point in time. The company had just built
a state-of-the-art manufacturing center and were heavily invested in
the development of a new automation product that was over budget
and past the hoped-for completion time, and this overshadowed any
potential gain that would be realized from a purchased ERP system.

xTuple
Information was being entered two or three times into the legacy
­systems that each department had developed, mostly in Excel. After
about 3 weeks had passed from the decision to forgo the traditional
ERP, the head engineer approached those involved with the ERP selec-
tion process and mentioned that his friend in a research and develop-
Supply Chain Management Software Options 53

ment arm of a major company was using a program called xTuple to

keep track of procurement, production, and costs. They were using
xTuple in conjunction with their company’s large vendor ERP system
to keep track of each project’s inputs and outputs, because the large
ERP program was only doing so from a macro view (simply keeping
track of the overall departments parts and costs). WETI’s head of engi-
neering and manufacturing was excited about the product and helped
others see how it might be a viable solution for the company’s many
ERP needs.

xTuple Implementation
After a quick overview of the xTuple website, the Postbooks installer
was downloaded through sourceforge.net via the xTuple Postbooks
project page. In addition to the source code, an SQL database was
also needed. All the installation information, including information
regarding the SQL database installation was available on the xTuple
website. PostgreSQL is the open-source database that xTuple installs
with.
Installation was easy, and in a matter of minutes the software was
loaded and functional in the most basic form. There was no data avail-
able, but the entire system was there to alter and test. There were a
few database options to choose from on the Sourceforge Postbooks
project page. In addition to the empty database, there is also the quick
start database, which contains a basic chart of accounts and also the
account assignments required to run a full range of transactions com-
mon to most businesses. In addition, there is a demo database that
contains the accounting data found in the quick start database and a
set of sample data such as parts, accounting chart of accounts, bill of
materials (BOM) data, and so on. For initial demonstration and test-
ing purposes the demo database was loaded.
The initial assessment of the Postbooks edition of xTuple only
lasted a few days by the two-person team in charge of finding and
implementing ERP for WETI. It was found to be very capable and
easy to use. In addition to the ERP software, xTuple also offered a
54 SUPPLY CHAIN INFORMATION TECHNOLOGY

free SQL report writer called OpenRPT. This feature provides a very
functional tool to query the PostgreSQL database for information and
reports such as sales quotes, work orders, purchase orders, inventory
reports, accounting information, and so forth. This additional compo-
nent was explored further in an effort to modify or create reports that
would give manufacturing, accounting, and purchasing the data in a
form that they were familiar with, as to lessen implementation pains
and also to better mold the ERP program into a product that would
closely match the way WETI like to run their company.
After about a month of this segmented testing, it was decided to go
ahead with a more structured implementation of the ERP system. Item
master data was added in batches as it was formatted and arranged in
a matter that suited the structure of the program and the use require-
ments of WETI. This went slowly due to the unstructured format that
the data was in and because of the lack of information for a large
number of items. Most of the parts being added were part of BOMs
for products that had never been tracked electronically. Many of those
major products and their subcomponents needed part numbers and
names, which added considerably to the time it took to organize the
data into a form that could be used by xTuple. Within a few weeks
there were approximately 750–1,000 parts out of over 16,000 entered
into the Postbooks database.
The open platform also allowed for modification of the functions
and reports found in the core software. This allows companies to mold
the software around some of the business practices that provide a com-
petitive advantage while also providing the benefits of a fully integrated
ERP program and the best practices most ERP software is based on.
Overall, open-source ERP software has been proven a capable solu-
tion for many businesses throughout the world. While it may not
account for a large percentage of market share, there is demand for
such solutions, and small business can gain many advantages from the
adoption of such software. OSS isn’t always free, but most companies
do offer a no-cost version of their software, with an upgrade path when
more functionality is needed.
Source: Olson and Staley (2012).
Supply Chain Management Software Options 55

Conclusion
There are many ways to obtain supply chain software support. Specialty
products such as APSs are available. However, this functionality is avail-
able in almost every ERP vendor system, with the added benefit of inte-
grating organizational computing. The amount of money required to
obtain software licenses is considerable, making it very important for
organizations to conduct a sound business case analysis. This isn’t easy, as
there are so many options available. That is undoubtedly why consultants
are so often used (which by no means reduces expense!).
Two interesting options to avoid many of these pitfalls are outsourc-
ing to ASPs or using OSS. Outsourcing has its own risks, although a
major benefit in upfront cash flow. However, outsourcing hasn’t been all
that popular for smaller organizations. It appears more often for major
organizations such as General Motors, Xerox, or U.S. government agen-
cies who wish to get out of the information system business and to focus
on their key business operations. OSS has proven quite popular in Europe
and South America, as well as for small organizations in the United
States (especially state and local governments). These systems cannot be
expected to provide all the functionality of well-tested commercial vendor
products, but they offer sufficient functionality for many organizations.
Installing an open-source ERP calls for a new type of information system
specialist, and this market is still under development.
In Chapter 4, we look at the key task of business process reengineer-
ing, followed by a closer look at business cases in Chapter 5 and software
installation project management in Chapter 6.
CHAPTER 4

Business Process
Reengineering in Supply
Chains
Michael Hammer coined the term business process reengineering (BPR)
in 1990. Enterprise resource planning (ERP) systems depend on BPR to
gain efficiency. The concept of BPR can be traced to its origins in man-
agement theories developed as early as the 19th century. The purpose of
reengineering is to “make all your processes the best-in-class.” Frederick
Taylor suggested in the 1880s that managers use process reengineering
methods to discover the best processes for performing work and that these
processes be reengineered to optimize productivity. BPR echoes the clas-
sical belief that there is only one best way to conduct tasks. Best practices
are vendor methods selected to be the best way to accomplish elemental
business tasks. Accomplishing this goal depends on maximizing the effec-
tiveness of policy development and program delivery, planning and budg-
etary arrangements, decision-making processes, organizational structures,
workplace relations, and people management. Significant gains in perfor-
mance have been attained through BPR.
BPR is suggested as a key step in the initial development of any organ-
ization’s ERP. While best practices often are useful, organizations that
have developed core competencies in specific functions are better served
by avoiding the vendor best practices that all their competitors can buy
to retain what they do well. Amazon.com undoubtedly retains processes
that it developed to make it successful in e-business rather than adopt all
their ERP vendor’s processes.
Increasingly, information and communications technology, often in
the form of an ERP, plays a vital role in determining the quality and acces-
sibility of services. Expansion in ERP has opened the door for even greater
efficiencies and enhanced service delivery through integrated processes.
58 SUPPLY CHAIN INFORMATION TECHNOLOGY

The strategic application of ERP opens up opportunities for even greater

gains as public and private sector enterprises transform their existing
processes. For individual enterprises and government agencies, the most
noteworthy gains are achieved when ERP decisions are business-driven.

Processes
A process is a logical set of related activities taking inputs, adding value
through doing things, to create an output. In business, there are many
different ways to get work done. Information systems play a key role in
providing a means to collect data, store it efficiently, generate reports to
let management know what the organization is doing, and archive data
for future reference as needed.
Blanket adoption of an ERP product will discard processes in which the
organization has developed a competitive advantage. Instead of changing
those processes, the ERP system should be modified. Other activities will be
better done following the ERP system’s best practices. Even here, a transition
period can be expected where employees who have to radically change what
they do. Productivity degradation will occur while users learn to adapt to the
new system. In the long run the new system is most often better. Those who
refuse to adapt to it usually have to learn new skills with their next employer.
In general processes can be divided into two broad categories. Opera-
tional processes have to do with accomplishing typical business functions,
including product development, order management, and customer sup-
port. Infrastructure processes are more administrative, such as establishing
and implementing strategy and managing many aspects of the organiza-
tion to include human resources, physical assets, and information sys-
tems. Each of these generic processes, whether operational or relating to
infrastructure, involves sets of tasks needed to accomplish work.
For example, in the operational process of order management, it is
necessary to forecast the volume of demand expected for the products
produced by an organization. The function of forecasting can be accom-
plished in many ways:

• using last month’s demand as a prediction for this month;

• using the monthly demand from a year ago as the prediction
for this month;
Business Process Reengineering in Supply Chains 59

• applying a spreadsheet algorithm such as exponential smooth-

ing over available monthly data;
• incorporating seasonality indices into such a spreadsheet
algorithm;
• taking known orders and adjusting forecasts based on past
demand records;
• relying on managerial judgment; or
• using guesswork (throwing darts, rolling dice, consulting a
Ouija board).

Whatever the forecasting method used, it can become part of the process
of determining the quantity to order each time an order is place.
A business process is what the organization does to get its work done.
For instance, supply chains need to take orders from customers and
contact downstream sources to create the product to fulfill orders. This
process requires a number of actions. Before computer automation, this
could have involved a process given in Figure 4.1.

Customer places order

Order sent to producer

Producer orders materials from sources

Source fills order, ships

Producer recieves materials

Producer makes product

Producer ships finished product

Product received Producer bills Producer receives Producer sends

and processed customer payment product to customer

Figure 4.1  Manual business process

60 SUPPLY CHAIN INFORMATION TECHNOLOGY

The old process begins with receiving the customer order and then
notifying the producer. The producer in turn then needs to notify its
material sources to obtain the things needed to make the product. Often
a single source was preferred, for simplicity and to reduce communica-
tion requirements. Once materials are received, the producer can proceed
with production and, when completed, ship finished goods to the core
supply chain organization. This organization then makes sure payment
is received and, when this payment is confirmed, sends the product to
the customer. The process is linear, slow, and has potential for miscom-
munication. Keep in mind that this is a simplified supply chain and could
involve many other elements.
Utilizing information technology offers many opportunities to reen-
gineer processes, making them more efficient. A possibility is given in
Figure 4.2.
Electronic automated systems can expand opportunities by reaching
lower price sources from a larger pool of candidate sources. This also can
reduce risk because more alternate sources are available in times of crisis,
such as disruption by earthquakes, tsunamis, volcanoes, or wars. Deregu-
lation and competition are drivers for the creation of new business models
through BPR. ERP systems provide a higher level of flexibility in meeting
growing customer demands, while demanding higher levels of automa-
tion and integration in almost all business processes.

Customer places order over Internet

Payment arranged Material

(by credit card?) sources
Producer plant schedules

Sources
send material
Plant produces

Product directly

Payments
transferred

Figure 4.2  Automated business process

Business Process Reengineering in Supply Chains 61

The change implicit in BPR has many risks. Even advocates of BPR
cite failure rates of 50–70 percent.1 Reasons for difficulty in implement-
ing BPR include:

• employee resistance to change;

• inadequate attention to employee concerns;
• mismatch of strategies used and goals;
• lack of oversight; and
• failure in leadership commitment.

Best Practices
One of the primary features of the SAP ERP product has been best prac-
tices. BPR is an activity designed to identify a best practice. Once a best
practice is identified that would seem applicable to most organizations,
it can be incorporated into an ERP system. SAP spends considerable
research efforts to identify the best way of doing conventional ERP tasks.
They had 800–1,000 best practices included in their R/3 software.2 Con-
sultants often develop further specialized expertise that firms can pur-
chase. A best practice is a method that has been judged to be superior
to other methods. This implies the most efficient way to perform a task.
A related concept is benchmarking. Benchmarking is comparing an
organization’s methods with peer groups, with the purpose of identify-
ing the best practices that lead to superior performance. Best practices
are usually identified through the benchmarking phase of a BPR activity.
Best practices thus often change the organizational climate and attempt
to bring about dramatic improvements in performance.
Vendors attempt to be comprehensive and to be all things to all peo-
ple. However, missed deadlines, excessive costs, and employee frustrations
are common in the implementation of ERP. A more participative design
approach could help in implementing ERP. If a client implements the
entire suite of SAP modules, as well as their tools for system implementa-
tion, SAP can ensure timely implementation within budget. However,
this approach disregards the human factors of the client business culture.
While BPR was designed to consider human values and business pur-
poses, these factors are clearly neglected in BPR application. Care needs
62 SUPPLY CHAIN INFORMATION TECHNOLOGY

to be taken to consider human factors in new processes. The human factor

costs of training and obtaining cooperative participation is the key to the
successful implementation of ERP.

Reengineering Options
Implementing reengineering can occur in two basic ways: either clean-
slate or technology-enabled BPR. While these are not the only choices
(they are the extremes of a spectrum of reengineering implementation
possibilities), they are good concepts to explain the choices available in
accomplishing reengineering.

Clean-Slate Reengineering

In clean-slate reengineering, everything is designed from scratch. In essence,

clean-slate engineering involves reengineering, followed by selection of that
software best supporting the new system design. Processes are reengineered
based on identified needs and requirements of the organization. As its name
implies, clean-slate reengineering has no predefined constraints. This theo-
retically enables design of the optimal system for the organization. This
approach is more expensive than technology-enabled reengineering, but
clean-slate reengineering is more responsive to organizational needs.
Clean-slate reengineering is slower and harder to apply than the tech-
nology-enabled approach to implementation. However, clean-slate reengi-
neering offers a way to retain competitive advantages that the organization
has developed. Ideally, this approach can develop the optimal system for the
organization. Clean-slate reengineering can also involve significant changes
in the way that the organization does business. However, the adjustment in
how organization members do their business often retains the features that
were found to work well in the past. Therefore, while training is required,
the impact is probably less than in the technology-enabled approach.

Technology-Enabled Reengineering

In technology-enabled reengineering, first the system is selected and then

reengineering is conducted (constrained reengineering). The r­ eengineering
process is thus constrained by the selected system. This approach is faster
Business Process Reengineering in Supply Chains 63

and cheaper than clean-slate reengineering, because the software does not
have to be changed (it is the basis of the design). Cap Gemini refers to
technology-enabled reengineering as concurrent transformation.
The technology-enabled approach designs the organizational sys-
tem around the abilities of the vendor software. SAP’s best practices, for
instance, are designed to do things right in the first place. If SAP’s research
came up with ways to do everything you do better than you used to do
them, this would be the best option. It is the easiest to implement, is usu-
ally much faster to implement, and thus costs less to implement. On the
negative side, it also usually involves the most change in organizational
practice and thus the most complications for training. In practice, there-
fore, while the ERP installation project looks great from time, budget, and
functionality perspectives, the actual benefits to the organization are often
disappointing. Table 4.1 compares trade-offs across these approaches.

Table 4.1  Comparison of clean-slate and technology-enabled

reengineering
Clean-slate advantages Technology-enabled advantages
Not constrained by tool limitations Focus on ERP best practices
Not limited by completeness of best Tools help structure and focus
practice database reengineering
Company may have unique features where Process bounded and thus easier
vendor best practices aren’t appropriate
Not subject to vendor software changes Know that design is feasible
May be only way to embed processes like Experience of others ensures design will
web, bar coding into new technology work
Maintain competitive advantage Greater likelihood of cost, time achievement
Software available (already developed)
No preexisting structure to design Reengineering limited by tool
Greater likelihood of infeasibility System evolution possibly limited by
technology
May involve more consultants System evolution may be limited by
technology
May be more costly, slower No relative advantage (others can
purchase same system)
May not work with selected ERP All best practices may not be available
64 SUPPLY CHAIN INFORMATION TECHNOLOGY

Many organizations have difficulty in efforts to switch from old legacy

systems to ERP. These legacy systems included distribution, financial, and
customer service systems developed in-house over the years.

Supply Chain BPR3

A large manufacturing company’s post-audit analysis of a supply chain
management software implementation is presented to demonstrate the
use of BPR. This company sold its products to a network of over 500
retailers. Customers gave this manufacturer low ratings on product order-
ing activities, but yet it was spending more than they wanted on operating
systems and processes. Furthermore, their current software vendor agree-
ment was near expiration. The company was thus looking for a product
ordering system.
They made a seasonal product on a make-to-order basis. Raw materi-
als were purchased, while the manufacturer produced its own packaging
materials. The supply chain consisted of the company (manufacturer, an
intermediate distribution network, and a large number of retail outlets. The
product was perishable, with a lead time of two to three months. Excess
production would be destroyed, while shortages resulted in lost sales.
The supply chain management software performed order manage-
ment, plant scheduling, and sales and operations planning. Customer
service worked with product distributors to establish suitable inventory
levels, product substitution rules, rules to handle rush orders and out-of-
stock cases. Delivery to distributors was by truck or rail.

Customer Ordering Process

The existing process consisted of the system taking customer sales fore-
casts to generate orders as far as eight weeks out, with a great number
of order changes one to three weeks prior to shipping. In the last week,
orders were confirmed, and if confirmed, shipped. There were multiple
forecasts that had different results, and a complicated system was used to
convert forecasts to orders.
The BPR assessment team sought a better customer ordering sys-
tem to manage peak inventory, running the plant, a better strategy for
Business Process Reengineering in Supply Chains 65

­istribution center inventory management, forecasting sales volume,

d
optimizing planning, and personal accountability. The resulting process
obtained order plans from customers four weeks out, with final orders
obtained one week prior to delivery, when orders were confirmed, and if
confirmed, shipped.

Peak Inventory Build Process

The old process began with setting target days of inventory. This led to
creating orders for 600 customers, modifying as changes to orders were
received, and sending products. Customers held about 19 days of inven-
tory (worth $122 million) while the company held an average of 10 days
(worth $24 million).
The new process included collaboration with customers to set days-
of-inventory targets, and obtaining agreements with 100 key customers
on peak inventory. The reengineered process lowered days of inventory
to 16 ($ 100 million) for customers and 8.5 days ($21 million) for the
company.

Plant Run Strategy

Plant operations had been run on a periodic strategy based on sales vol-
ume, product quality, and delivery dates. Scheduling of plants was cen-
tralized. This was replaced by a strategy based on run frequency that
considered sales volume, quality, minimum run size, cost of changeovers,
and inventory costs. Run strategies were set on a plant and geographically
specific basis.

Distribution Center Management

The old process took company sales forecasts and aggregated distribu-
tion center volumes to set days-of-inventory targets for each distribution
center. Future distribution center deliveries were forecast to generate cus-
tomer days-of-inventory, which along with projected distribution center
inventories were used to project future inventories and compare with tar-
gets. This generated replenishment quantities.
66 SUPPLY CHAIN INFORMATION TECHNOLOGY

The new process for distribution centers started with the run strategy
replenishment cycle time, variability in demand and supply, and company
forecast to generate distribution center targets per week. Actual customer
orders were used along with these targets to calculate actual inventory at
each distribution center, using these bits of information to make replen-
ishment decisions.

Forecasting

A new forecasting process was developed based on sales department com-

mitments and other demand information to generate operations plans.
Sales and operations scenario planning then modified these plans to
obtain updates on sales, production, and inventory.

Information Technology

The company had seven hardware platforms supporting over 70 software

applications. These were replaced by an SAP system supplemented by
seven add-ons. Roles and accountabilities of company personnel were sig-
nificantly improved, focusing on the reengineered processes.
The BPR in this case integrated firm processes. Users as well as IT
had a better understanding of the company’s processes and were able to
cooperate much more effectively. Projected savings in terms of capital
investment and finished goods inventory were exceeded, and long with
better management of returnable containers, resulted in one-time savings
of over $27 million, along with annual benefits of $1.5 million, improv-
ing internal rate of return from 20 percent to 29 percent.

Conclusion
BPR is an important philosophy. It aims to achieve improvements in per-
formance by redesigning the processes through which an organization
operates, maximizing their value-added content. This approach can be
applied at an individual process level or to the whole organization. BPR
is often a major component of an ERP installation. This implies massive
changes in the way in which organizations do their business. This has
Business Process Reengineering in Supply Chains 67

great potential payoff, but also implies a great deal of change in people’s
work lives, which requires a lot of attention to demonstrate benefits, as
well as a great deal of retraining.
Requirements analysis is important in identifying what a proposed
system is to do. In ERP projects, requirements analysis takes the form
of BPR, to identify the best way (best practice) for each business pro-
cess supported by the system. BPR can be accomplished in many ways,
but two ways represent the extremes. Clean-slate BPR starts from scratch
and is the ideal approach. Technology-enabled BPR begins with the soft-
ware selected. This is faster and less expensive, as many of the processes
are selected from the system. In practice, neither extreme is necessarily
best. Hammer and Stanton credited reengineering as doing a great deal
of good, despite being a euphemism for mindless downsizing by some.4
BPR has enabled companies to operate faster and more efficiently and to
use information technology more productively. Employees often obtain
more authority and a better understanding of the role their work plays for
the organization as a whole. Customers get higher-quality products and
more responsive service. Shareholders obtain larger dividends and higher
stock values because BPR reduces cost and increases revenues. Executives
no longer see their organizations as separate entities but instead see them
as related elements in larger systems linked through information flows
across the business, reaching customers and suppliers.
CHAPTER 5

System Selection
Installing supply chain management (SCM) systems, whether a stan-
dalone system or as a component of an enterprise resource planning
(ERP) system, would seem to be a simple matter. After all, the software,
while expensive, has been thoroughly tested by many customers. How-
ever, ERP implementations are consistently reported to have failure rates
in excess of 60 percent.1 A business case should be a key part of the pro-
cess of selecting the form of supply chain software for an organization.
This chapter demonstrates fundamental means of financial analysis and
shows how other methods can be used to consider other factors describ-
ing expected project performance.
Cost–benefit analysis seeks to identify accurate measures of benefits
and costs in monetary terms and uses the ratio of benefits to costs. Costs
and benefits for software systems are inherently difficult to estimate accu-
rately because the many uncertainties, many hidden (unexpected) costs,
and potential benefits are difficult to measure precisely.

Total Cost of Ownership

Different types of cost are unique to supply chain software applications:

1. Obvious cost: The license cost of the software itself is the most under-
standable.
2. Cost of system integration: This is probably the single major factor in
determining the long-term cost of a system. If a small company buys
an inventory control and accounting system, they would want the
system be interfaced with their customer relationship management
system and also to their shipping system in the warehouse. The com-
pany will also need some modifications to the central part order entry
70 SUPPLY CHAIN INFORMATION TECHNOLOGY

system, which interacts with customer and shipping data. Interfaces

and the customization are costly and more involved with time.
3. Cost of implementation: This is the cost of getting the system live
in the first place. Implementation costs vary widely based on the
application. Components of this cost are data migration services,
systems integration, training, consulting, process engineering, and
project management.
4. Expenses of customization: Almost every business software imple-
mentation calls for at least some customization. As technology has
advanced, the cost of customization has come down; however, this
continues to be a major cost with supply chain software.
5. Platform: Software requires a computer platform. The older the
computer platform, the higher the likelihood that a more powerful
platform will be required to adequately support a new supply chain
software system.
6. Safeguarding costs: Maintenance to sustain the system is an ongoing
annual cost. Companies often charge around 20 percent of the pur-
chase price per year for this cost category.
7. Training costs: Training of user personnel is critical. A period of about
one year is usually required until the trauma of new system imple-
mentation passes. This difficult period is easier to cope with if a good,
thorough training program is adopted. Managers generally tend to
underestimate the magnitude required in such a training program.

Total cost of ownership (TCO) has long been recognized as a

significant factor in supply chain software strategies and decisions. Yet
while both end users and vendors tend to talk about lower TCO, and
many vendors claim it as a point of differentiation, seldom do they speak
in terms of specific metrics.
Because supply chain systems involve long time frames (for benefits, if
not for costs as well), considering the net present value (NPV) of benefits
and costs is important. We will start with basic cost–benefit analysis and
then consider value analysis (one way to deal with subjective benefits)
and a simple version of multiattribute utility theory (a means to consider
trade-offs across multiple measures of value).
System Selection 71

Cost–Benefit Example
Consider a proposed supply chain software implementation involving an
implementation study in Year 1 conducted by a small team of company
personnel, aided by a hired consultant at $500,000 in the first year. This
is a fairly small implementation, and at this stage of the analysis, typically
expected costs are underestimated. This analysis in Year 1 includes some
business process reengineering and the formation of a training team. This
cost analysis assumes the purchase of a $500,000 supply chain software
system from a reputable vendor, with maintenance costs for patches and
upgrades of $100,000 each year thereafter. Extra hardware to support the
proposed system will be needed in Year 1 at $750,000. Training expense
will be low in Year 1, high in Year 2, and drop thereafter. The firm wants
to treat software acquisition, hardware acquisition, and consulting in the
first year as an investment.
Operating the system will also incur costs. This budget is expected to
be $1 million in Year 1, growing at a rate of 10 percent per year thereafter.
The firm’s cost of capital is 10 percent.
The board disagreed somewhat about the expected rate of growth of
benefits. The dominant group on the board expects benefits from the sup-
ply chain system to be $2 million per year in Year 2, $3 million in Year 3,
and to grow at 30 percent per year thereafter. The time horizon selected
is five years, as new software is expected to outdate any currently available
system after that time.
The board often disagreed about assumptions in cost–benefit models.
A vocal minority thinks that this expectation is far too high and that
benefits will only grow at the rate of 10 percent annual increase after Year 3.
This data is summarized in Table 5.1.
Cost–benefit analysis is somewhat arbitrary because it usually is
applied considering up-front expenditure as investment, used in the
denominator, with net cash flow thereafter used in the numerator. Con-
tinuing with our earlier example, investment here is the $2,150,000 spent
on consultants, software acquisition, and hardware. One version of the
cost–benefit ratio would thus be the following:

($13,970,000 − $6,105,100 − $3,450,000)/$2,150,000 = 2.053

72 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 5.1  Cost–benefit analysis input data—example proposal

Internal
Year team Consultants Software Hardware Training Benefits
1 1,000,000 500,000 500,000 750,000 500,000
2 1,100,000 100,000 750,000 2,000,000
3 1,210,000 100,000 1,000,000 3,000,000
4 1,331,000 100,000 800,000 3,900,000
5 1,464,100 100,000 400,000 5,070,000
Totals 6,105,100 500,000 900,000 750,000 3,450,000 13,970,000

This looks like a very profitable investment, with the investment cov-
ered 2.053 times. Furthermore, the arbitrary nature of what to include as
investment can be demonstrated by assigning all costs to investment (not
recommended, but for purposes of demonstration):

$13,970,000/($6,105,100 + $500,000 + $900,000 + $750,000 +

$3,450,000) = 1.193

Here benefits still cover investment, but the ratio is much lower.
Another problem is that the benefits are all in the future, while the bulk
of the costs are early. Money has a time value.

NPV Calculation
NPV is calculated by discounting the net cash flow in each period by
the discount rate to the power of the time period and then adding these
discounted cash flows over the horizon of the analysis. Table 5.1 organizes
cash flows for each category by the time period used in the analysis (in
this case, by year). Note that a more accurate NPV can be obtained using
a shorter time period. Ultimately, you could calculate NPV per second,
but that is far too precise. Your savings account is probably calculated on
a daily basis. For purposes of analysis, a monthly period is probably good.
However, the shorter the time period, the more spreadsheet rows would
be required, and the harder it would be to display. We will use a year as
our time horizon.
System Selection 73

Table 5.2  Net present value calculation—example proposal

Year Net cash flow Discounted

1 −3,250,000 −2,954,545
2 +50,000 +41,322
3 +690,000 +518,407
4 +1,669,000 +1,139,949
5 +3,105,900 +1,928,520
Total +2,264,900 +673,653

NPV is obtained by aggregating each time period’s cash flow and

dividing by the discount rate to the power of the time period, as shown in
Table 5.2, using a discount rate of 1.1 per year.
For Year 1, the total cash flow (benefits minus all five expense catego-
ries) is −$3,250,000. That is equivalent in today’s value to −$3,250,000/
(1.1^1), or $2,954,545. For Year 2, the total cash flow is +$50,000,
equivalent in today’s value to $50,000/(1.1^2), or $41,322. In this case,
over the five-year planning horizon, nominal net cash flow is estimated
to be a net gain of over $2 million. This stream of cash flow at the cost
of capital (discount rate) of 1.1 is a net gain of $673,653, indicating that
at the cost of capital used, over the planning horizon considered, this is
a worthwhile investment. (The indicator is whether or not the sum of
discounted cash flows is positive or not.)
Note that if we increased the discount rate to 1.2, the NPV would
be a negative $221,234, meaning that the proposal would not financially
justify a cost of capital of 20 percent per year. This implies that the pro-
posal would break even if the project achieved somewhere between a
10 percent and a 20 percent rate of return. We can try various discount
rates on a spreadsheet until we identify a discount rate just above 16.9
percent where the NPV will be zero. The implication is that this invest-
ment would return 16.9 percent per year on the investment.
Cash-flow analyses of this type are very useful, especially with spread-
sheet support. It clearly displays the many assumptions made. It is com-
mon for business decision makers to be uncertain about most of the
entries in the spreadsheet. In fact, it is common for different individuals
to have different beliefs about specific assumed values. The good thing
74 SUPPLY CHAIN INFORMATION TECHNOLOGY

about spreadsheet analysis of expected cash flow is that each different set
of assumptions could be entered, and expected NPV identified.

Payback
One of the most common reasons for company failure in the United
States is lack of cash flow. In our example, if the firm has cash-flow diffi-
culties, the investment would be less attractive than if they had adequate
cash reserves. Making the assumption that over time cash flow will turn
positive at some point and remain positive thereafter, we can use another
metric, payback, to identify the time until the investment will be recov-
ered. This could be done in NPV terms (using discounted cash flows), or
in nominal terms (with undiscounted cash flow). Either way, payback is
interested in how long it will take to recover investment. The calculation
is simply cumulative cash flow. Given the assumption of an initial invest-
ment leading to future positive cash flows, the time until cumulative cash
flow turns positive is payback time. This is often used by decision makers
to gauge the attractiveness of an investment. Table 5.3 shows calcula-
tions for our example SCM system, for both nominal and discounted
cash flow.
Here the payback period is under five years in both cases. Using nomi-
nal (undiscounted) values, it would take four years and just over three
months to recover the initial investment (assuming a linear rate of cash
flow in Year 5). With the discounted numbers, it would take four years
and almost eight months to recover the investment. In either case, the
payback is between four and five years. We can also see that the firm will

Table 5.3  Payback calculation

Net
Net (discounted
Year (undiscounted) Cumulative 10%) Cumulative
1 −3,250,000 −3,250,000 −2,954,545 −2,954,525
2 +50,000 −3,200,000 +41,322 −2,913,223
3 +690,000 −2,510,000 +518,407 −2,394,816
4 +1,669,000 −841,000 +1,139,949 −1,254,866
5 +3,105,900 +2,264,920 +1,928,520 +673,653
System Selection 75

need cash reserves of at least $3,250,000 to survive the project (nearly

$3 million in NPV terms).

Sensitivity Analysis
A very good thing about spreadsheet cash-flow models is that you can
include any assumption. (On the other hand, the bad thing is that so
many assumptions are required!) To demonstrate, we might assume
a vocal minority on the board thinks that the expected rate of benefit
increase is too high, and instead of 30 percent growth in benefits after
Year 2, they expect that these benefits will only grow at the rate of 10 per-
cent annually. We can demonstrate the impact of this assumption change
in Table 5.4. (That’s what sensitivity analysis is—checking for the impact
of changed entries into the model.)
Here the assumption in benefit growth in Years 4 and 5 doesn’t
change the decision if payback is desired within five years. However,
the project would be expected to be much less profitable (to the tune
of $2 million in nominal cash flow). The NPV at 10 percent discount
would drop to −$630,282, indicating that with the lower benefit
growth assumption, the project would not return 10 percent per year.
The return on investment (ROI) turns out to be 1.021, or an average of
2.1 percent return on the firm’s money. They could probably find better
things to do with their investment capital should benefit growth be the
more conservative.
The problem with cash-flow spreadsheet analysis is that practically
every entry is an assumption, which could be debated. As we said, the nice

Table 5.4  Impact of benefit growth rate

High High Low Low
Year Expenses benefits cumulative benefits cumulative
1 3,250,000 −3,250,000 −3,250,000
2 1,950,000 2,000,000 −3,200,000 2,000,000 −3,200,000
3 2,310,000 3,000,000 −2,510,000 3,000,000 −2,510,000
4 2,231,000 3,900,000 −841,000 3,300,000 −1,441,000
5 1,964,100 5,070,000 +2,264,900 3,630,000 +224,900
Totals 11,705,100 13,970,000 11,930,000
76 SUPPLY CHAIN INFORMATION TECHNOLOGY

thing is that it is easy to change and see the impact of any one assumption
(or set of assumptions). However, there can be many details to check.

Value Analysis
Peter Keen proposed value analysis as an alternative to cost–benefit analy-
sis in the evaluation of proposed information system projects. These pro-
jects, clearly attractive to business firms, suffer in that their benefits are
often heavily intangible. For instance, decision support systems are meant
to provide decision makers with more complete information for decision
making. However, what is the exact dollar value of improved decision
making? We all expect the success of firms to be closely tied to effective
decision making, but better decision making cannot be rationally and
accurately measured.2
Value analysis was presented as a way to separate the benefits meas-
ured in intangible terms from costs, which are expected to be more accu-
rately measurable. Those tangible benefits as well as costs can be dealt
with in net present terms, which would provide a price tag for proposed
projects. The value of the benefits would be descriptive, with the intent
of showing the decision makers accurate descriptions of what they were
getting, along with the net present price. The decision would then be
converted to a shopping decision. Many of us buy automobiles, despite
the fact that the net present cost of owning an automobile is negative.
Automobiles provide many intangible benefits, such as making the driver
look very sporty, letting the driver speed over the countryside, and letting
the driver transport those they would like to impress. The dollar value of
these intangible benefits is a matter of willingness to pay, which can be
identified in monetary terms by observing the purchasing behavior of
individuals. This measurement requires some effort and is different for
each individual.
Assume a firm is considering five different ways to implement some or
all of an SCM (plus the alternative of doing nothing). The options, with
estimated investments and benefits, are given in Table 5.5.
Value analysis would consist of presenting the decision maker with the
intangible comparisons in performance and placing the decision in the
context of whether or not the decision maker thought the improvements
System Selection 77

Table 5.5  Alternative system implementation options for example

enterprise resource planning
Net present
Alternative Investment value
A–Full vendor ERP implementation, all modules $15 million $5 million
B–Vendor ERP, only FA, MM and SCM modules $11 million $7 million
C–Vendor, only SCM module $8 million $8 million
D–In-house development $25 million −$2 million
E–Open-sourced system $3 million $4 million
F–Do nothing (current system) 0 0

provided by the new machine were worth their price tag. This requires an
analysis of expected benefits from each system. The following are reasons
this particular management team is interested in an SCM:

• To update current business processes (through business

process reengineering)
• To standardize procedures within the organization
• To make interaction with suppliers and customers over web
technology possible
• To gain strategic advantage
• To keep up with competitors
• To minimize system disruption
• To maximize positive net financial impact

The expected performance of each alternative on the six qualitative

factors is given in Table 5.6.
In this approach, the expected benefits are understood to be highly
variable and are treated as a rough estimate. Costs are assumed to be a bit
more reliable. Therefore, the options, in descending order of price, are as
follows:

A—Full implementation of vendor product expected to cost

$15 million:
Complete BPR analysis and standardization
zz

Top-of-the-line Internet access for suppliers and customers

zz
78

Table 5.6  Qualitative features of enterprise resource planning options in example

Alternative BPR Standardize Internet Advantage Keep up Disruption
A–Full Complete Complete Best Equal Best 5 years
B–FA, MM, SCM Partial Partial Best Less than A Less than A 4 years
C–SCM Minimal Partial Best Less than B Less than B 1 year
D–In house Complete Complete Problematic Best Mediocre 7 years
E–Open source Minimal Partial Good Moderate Low 2 years
SUPPLY CHAIN INFORMATION TECHNOLOGY

F–Nothing Nothing Nothing Worst Worst Worst 0

System Selection 79

zz State-of-the-art ERP system, which competitors also have

access to
zz Serious disruption of operations through installation in
f ive years
Expected benefit: NPV $20 million, for net gain of $5 million.
B—Partial implementation of vendor product expected to cost
$11 million:
zz Partial BPR analysis and standardization
zz Top-of-the-line Internet access for suppliers and customers
zz State-of-the-art for modules obtained, which competitors
also have access to
zz Serious disruption of operations through installation in
four years
Expected benefit: NPV $18 million, for net gain of $7 million.
C—Minimal implementation of vendor product expected to cost
$8 million:
zz Minimal BPR analysis, partial standardization
zz Top-of-the-line Internet access for suppliers and customers
zz State-of-the-art for SCM only, which competitors also have
access to
zz Serious disruption of operations through installation in
one year
Expected benefit: NPV $16 million, for net gain of $8 million.
D—In-house implementation expected to cost $25 million:
zz Complete BPR analysis and standardization
zz Suspect Internet access for suppliers and customers
zz Custom-designed system with features competitors don’t
have, but no best practices
zz Serious disruption of operations through installation in
seven years
Expected benefit: NPV $23 million, for net gain of −$2 million.
E—Open-sourced system expected to cost $3 million:
zz Minimal BPR analysis and standardization
zz Basic Internet access for suppliers and customers
zz Proven ERP, but with less functionality than others
zz Minimal impact on operations
80 SUPPLY CHAIN INFORMATION TECHNOLOGY

Expected benefit: NPV $7, for net gain of $4 million.

F—Do nothing, expected to cost $0:
zz No BPR analysis and standardization
zz Primitive Internet access for suppliers and customers
zz No ERP or SCM system, in market where competitors do
zz No disruption of operations
Expected benefit: NPV $0, for net gain of $0 million.

Management can now view each option as a market basket of benefits,

each with its own price tag. In this case, the key difference is building the
system in-house, adopting a variant of the vendor system, installing an
open-source software system, or doing nothing. Building the system in-
house clearly has many risks and involves the most out-of-pocket invest-
ment. Management might well discard that option unless they are very
confident in their ability to develop complex software projects. The open-
sourced option has attractive features but involves more uncertainties and
doesn’t provide the best BPR options. Among the vendor options, Option
A has the best features on reengineering, standardization, and Internet
connectivity. However, it would involve five years of disruption, and call
for a $15 million investment. Option B would save $4 million in invest-
ment with the same Internet access at only four years of disruption but
would sacrifice a bit on BPR factors, standardization, relative competitive
advantage, and keeping up with competitors. Management might feel
that the gains in disruption are worth the sacrifices in BPR, standardiza-
tion, competitive advantage, and competitiveness. For only an $8 million
investment, Option C would involve sacrifice of even more BPR, strate-
gic advantage, and competitiveness but would save three additional years
of disruption. However, it may be paramount to obtain higher degrees of
methods improvement through business process reengineering and stand-
ardization of business functions across the organization.
By focusing on the important features involved, management may be
able to conclude that Option A, B, or C is preferable to the other options
available.
Taking value analysis one more step, to quantify these intangible
benefits in terms of value (not in terms of dollars) takes us to multiple
criteria analysis.
System Selection 81

Multiple Objective Analysis

Profit has long been viewed as the determining objective of a business.
However, as society becomes more complex, and as the competitive
environment develops, businesses are finding that they need to consider
multiple objectives. While short-run profit remains important, long-run
factors such as market maintenance, product quality, and development of
productive capacity often conflict with measurable short-run profit.
Conflicts are inherent in most interesting decisions. In business, profit
is a valuable concentration point for many decision makers because it
has the apparent advantage of providing a measure of worth. Minimiz-
ing risk becomes a second dimension for decision making. Cash-flow
needs become important in some circumstances. Businesses need devel-
oped markets to survive. The impact of advertising expenditure is often
very difficult to forecast. Yet decision makers must consider advertising
impact. Capital replenishment is another decision factor, which requires
consideration of trade-offs. The greatest short-run profit will normally be
obtained by delaying reinvestment in capital equipment. Many U.S. com-
panies have been known to cut back capital investment in order to appear
reasonably profitable to investors. Labor policies can also have impact on
long-range profit. In the short run, profit will generally be improved by
holding the line on wage rates and risking a high labor turnover. Some
costs are not obvious, however, in such a policy. First, in a high-turnover
environment, training costs rise. The experience of the members of an
organization can be one of its most valuable assets. Second, it is difficult
for employees to maintain a positive attitude when their experience is that
short-run profit is always placed ahead of employee welfare. And innova-
tive ideas are probably best found from those people who are involved
with the grassroots of an organization—the workforce.
This variety of objectives presents decision makers with the need to
balance conflicting objectives in ERP option selection. We will present
the simple multiattribute rating technique (SMART), an easy-to-use
method to aid selection decisions with multiple objectives.
Multiple criteria analysis considers benefits on a variety of scales
without directly converting them to some common scale such as dollars.
Multiple criteria analysis (with its many variants) is not at all perfect.
82 SUPPLY CHAIN INFORMATION TECHNOLOGY

However, it does provide a way to demonstrate to decision makers the

relative positive and negative features of alternatives and gives a way to
quantify the preferences of decision makers.3
Fit with business procedures was selected among the three most impor-
tant criteria by about one-half of the respondents and was listed as the sin-
gle most important criterion by over one-third. While ERP vendors have
devoted a great deal of effort to making their packages match existing
business processes, the importance of this criterion is based on the high
cost and bother of configuring and implementing ERP systems. Selection
of a vendor involved less variance among criteria. Product functionality
and quality were the criteria most often reported to be important.
Perhaps the easiest application of multiple criteria analysis is the
SMART analysis, which identifies the relative importance of criteria in
terms of weights and measures the relative performance of each alterna-
tive on each criterion in terms of scores.4 We will first explain scores.
Scores: Scores in SMART can be used to convert performances (sub-
jective or objective) to a zero-to-one scale, where zero represents the worst
acceptable performance level in the mind of the decision maker and one rep-
resents the ideal, or possibly the best performance desired. Note that these
ratings are subjective, which is a function of individual preference. Scores
for the criteria given in the value analysis example could be as in Table 5.7.
Weights: The next phase of the analysis ties these ratings together into
an overall value function by obtaining the relative weight of each crite-
rion. In order to give the decision maker a reference about what exactly
is being compared, the relative range between best and worst on each
scale for each criterion should be explained. Many methods are avail-
able to determine these weights. In SMART, the process begins with

Table 5.7  Scores by criteria for each option in example

Option BPR Standard Internet Advantage Competition Disruption Financial
A 1.0 1.0 1.0 0.7 1.0 0.1 0.85
B 0.9 0.7 1.0 0.5 0.8 0.3 0.90
C 0.6 0.7 1.0 0.2 0.6 0.9 0.95
D 1.0 1.0 0.6 1.0 0.1 0.0 0.0
E 0.6 0.7 0.8 0.6 0.4 0.8 0.7
F 0.0 0.0 0.0 0.0 0.0 1.0 0.2
System Selection 83

r­ ank-ordering the four criteria. A possible ranking for a specific decision

maker might be as given in Table 5.8.
To obtain relative criterion weights, the first step is to rank-order
criteria by importance. Two estimates of weights can be obtained. The
first assigns the least important criterion 10 points and assesses the rela-
tive importance of each of the other criteria on that basis. This process
(including rank-ordering and assigning relative values based on moving
from worst measure to best measure based on most important criterion)
is demonstrated in Tables 5.9 and 5.10.

Table 5.8  Worst and best measures by criteria

Criteria Worst measure Best measure
Update systems (BPR) Nothing Complete
Standardize business processes Nothing Complete
Internet connectivity to None Modern
suppliers and customers
Gain strategic advantage Do nothing Develop unique system
Keep up with competition Do nothing State-of-the-art vendor
Minimize disruption Seven-year installation Current system
Financial implications Risk $25 million, Risk $3 million,
lose $2 million gain $4 million

Table 5.9  Weight estimation from perspective of most important

criterion
Criteria Worst measure Best measure Assigned value
1-Gain strategic Do nothing Develop unique 100
advantage system
2-Keep up with Do nothing Use state-of-the-art 70
competition
3-Internet None Modern 50
connectivity
4-Update systems Nothing Complete 30
(BPR)
5-Minimize 7-year installation Current system 20
disruption
6-Financial Risk $25 mil, Risk $3 mil, 10
implication lose $2 mil gain $4 mil
7-Standardize Nothing Complete 3
business processes
84 SUPPLY CHAIN INFORMATION TECHNOLOGY

The total of the assigned values in Table 5.9 is 283. One estimate of
relative weights is obtained by dividing each assigned value by 283. Before
we do that, we obtain a second estimate from the perspective of the least
important criterion, which is assigned a value of 10 as in Table 5.10.
These assigned values in Table 5.10 add up to 345. The two weight
estimates are now as shown in Table 5.11.

Table 5.10  Weight estimation from perspective of least important

criterion
Criteria Worst measure Best measure Assigned value
7-Standardize Nothing Complete 10
business processes
6-Financial Risk $25 million, Risk $3 million, 25
implications lose $2 million gain $4 million
5-Minimize Seven-year Current system 30
disruption installation
4-Update systems Nothing Complete 50
(BPR)
3-Internet None Modern 60
connectivity
2-Keep up with Do nothing Use state-of-the-art 70
competition
1-Gain strategic Do nothing Develop unique 100
advantage system

Table 5.11  Criterion weight development

Based on Based on
Criteria best worst Compromise
1-Gain strategic 100/283 0.35 100/345 0.29 0.33
advantage
2-Keep up with 70/283 0.25 70/345 0.20 0.23
competition
3-Internet connectivity 50/283 0.18 60/345 0.17 0.17
4-Update systems (BPR) 30/283 0.11 50/345 0.14 0.12
5-Minimize disruption 20/283 0.07 30/345 0.09 0.08
6-Financial implications 10/283 0.04 25/345 0.07 0.05
7-Standardize business 3/283 0.01 10/345 0.03 0.02
processes
System Selection 85

Table 5.12 Value score calculation

Option Option Option Option Option Option
Criteria Weight A B C D E F
Strategic 0.33 × 0.7 = × 0.5 = × 0.2 = × 1.0 = × 0.6 = × 0.0 =
advantage 0.231 0.165 0.066 0.330 0.198 0.000
Competition 0.23 × 1.0 = × 0.8 = × 0.6 = × 0.1 = × 0.4 = × 0.0 =
0.230 0.184 0.138 0.023 0.092 0.000
Internet 0.17 × 1.0 = × 1.0 = × 1.0 = × 0.6 = × 0.8 = × 0.0 =
0.170 0.170 0.170 0.102 0.136 0.000
Update 0.12 × 1.0 = × 0.9 = × 0.6 = × 1.0 = × 0.6 = × 0.0 =
(BPR) 0.120 0.108 0.072 0.120 0.072 0.000
Minimize 0.08 × 0.1 = × 0.3 = × 0.9 = × 0.0 = × 0.8 = × 1.0 =
disrupt 0.008 0.024 0.072 0.000 0.064 0.080
Financial 0.05 × 0.85 = × 0.9 = × 0.95 = × 0.0 = × 0.7 = × 0.20 =
0.043 0.045 0.048 0.000 0.035 0.010
Standardize 0.02 × 1.0 = × 0.7 = × 0.7 = × 1.0 = × 0.7 = × 0.0 =
0.020 0.014 0.014 0.020 0.014 0.000
Totals 1.00 0.822* 0.710 0.580 0.595 0.611 0.090

The last criterion can be used to make sure that the sum of compro-
mise weights adds up to 1.00.
Value Score: The next step of the SMART method is to obtain value
scores for each alternative by multiplying each score on each criterion
for an alternative by that criterion’s weight and adding these products by
alternative. Table 5.12 shows this calculation.
These value scores (shown in the totals row) provide a relative score
that can be used to select (take the alternative with the highest value
score), or to rank-order (by value score). In this case, the SMART analysis
indicates a preference for Option A, the full version of the vendor ERP
system. This is followed relatively by Option B, which is to reduce func-
tionality to finance and accounting and materials management modules.
Other options have lower ratings, while doing nothing is practically off
the chart in a negative way.

Supply Chain Software ERP Issues

Supply chain software can be very effective in managing large supply
chains. Unfortunately, more than 90 percent of the companies that have
86 SUPPLY CHAIN INFORMATION TECHNOLOGY

implemented ERP systems have not had a truly successful implementa-

tion the first time around.

• Supply chain software should be motivated by accurate strate-

gic and tactical process improvement objectives, with docu-
mented assumptions and valid ROI expectations and metrics.
• Supply chain software must be implemented appropriately
and in a timely manner to attain ROI expectations.

These two points may seem obvious, but SCM is not usually initially
approached in this manner. As a result, many problems come to pass
during and after implementation. This often requires a reimplementation
effort or at least a major tune-up. ROI comes from process improvements
that supply chain software supports, not from new software itself. What’s
the difference? Software alone, no matter how good it is, has little impact
on improving business performance. If you continue to use presoftware
business processes after implementation, you can anticipate identical or
possibly worse performance. Software can, on the other hand, enable
many new processes.
The study confirmed the decision that Toroid had made with the
adopted Syteline system receiving the highest score. Table 5.13 demon-
strates that Syteline’s greatest advantage was in cost and benefits, which
had a relatively high weight.

Table 5.13  Toroid international enterprise resource planning

selection data
Syteline
Criteria Weight SAP score IFS score score
Business strategy 0.323 0.327 0.369 0.304
Change management 0.040 0.311 0.266 0.423
Risk 0.040 0.250 0.416 0.334
Functional fit 0.149 0.360 0.345 0.295
Cost and benefits 0.288 0.271 0.135 0.594
Technology 0.063 0.333 0.333 0.333
Vendor position 0.097 0.409 0.305 0.285
Overall score 0.320 0.287 0.392
System Selection 87

Enterprise Resource Planning System Evaluation

by Toroid International Ltd.5
Toroid International is a transformer manufacturer with roughly 2,000
employees in Sri Lanka. They adopted an enterprise resource planning
(ERP) system, based on the decision of top- and mid-level manage-
ment advised by their information technology department. The origi-
nal decision was based on Toroid’s business strategy, mainly driven by
cost. A detailed analysis of impact on the company was not conducted.
Options considered were IFS, SAP, and Syteline ERP software pack-
ages. The original decision was supported primarily by vendor recom-
mendations.
Perera and Costa proposed a multiple criteria analysis for ERP sys-
tem selection, suing the Toroid case history to demonstrate the use
of analytic hierarchy process (AHP) in this context. Judgments were
based on input from the three top managers who had participated in
the ERP implementation. Criteria considered were as follows:

• Business strategy
• Improved SCM
• Increased customer support
• Decreased risk
• Functional fit
• Technology
• Vendor position
• Cost and benefits
• Management changes

AHP was used to generate weights for the seven major criteria (the
weight for business strategy split into 0.75 for SCM aspects and 0.25
for increasing customer support). AHP was also used to score each of
the three candidate packages on these seven criteria. Evaluation was
conducted using Expert Choice software. Table 5.13 gives resulting
scores and weights.
Source: Adapted from Perera and Costa (2008).
88 SUPPLY CHAIN INFORMATION TECHNOLOGY

Conclusion
Many costs arise when implementing supply chain software. Many of
these are hidden and especially difficult to estimate because most organi-
zations don’t repeat the exercise. We have reviewed some of the primary
methods used to evaluate SCM proposals. Cost–benefit analysis (with
NPV used if the time dimension is present) is the ideal approach from the
theoretical perspective but has a number of limitations. It is very difficult
to measure benefits and also difficult to measure some aspects of costs
accurately. One view of dealing with this problem is to measure more
accurately. Economists have developed ways to estimate the value of a life
and the value of scenic beauty. However, these measures are difficult to
sell to everybody.
Cost–benefit analysis provides an ideal way to proceed if there are no
intangible factors (or at least no important intangible factors). However,
usually such factors are present. Intermediate approaches, such as payback
analysis and value analysis, exist to deal with some cases. More complex
cases are better supported by multiple criteria analysis. One of the most
obvious difficulties is that benefits, and even costs, can involve high levels
of uncertainty. The element of chance can be included in cost–benefit
calculations by using Monte Carlo simulation.6
Value analysis is one such alternative method. Value analysis isolates
intangible benefits from those benefits and costs that are more accurately
measurable in monetary terms and relies on decision-maker judgment to
come to a more informed decision. The SMART method, one of a family
of multiple criteria decision analysis techniques, provides a way to quan-
tify these intangible factors to allow decision makers to trade off values.
CHAPTER 6

Supply Chain Software

Installation Project
Management
Supply chain management (SCM) support can be obtained in many
ways, some of which have been discussed in Chapter 5. Regardless of how
a SCM system is acquired, installing it is a major project. Project plans
need to be aggressive because SCM systems are very critical to organi-
zational efficiency (the sooner the system is brought online, the sooner
benefits are obtained). It is difficult to reliably estimate durations of any
information systems project. Due to the need to balance realism with
urgency, schedules should be aggressive but achievable.
The type of SCM system adopted impacts the need for changes.
Adoption of a single vendor package without modifications will reduce
the need for customization, and thus will reduce project complexity,
which fosters better schedule performance. However, the primary objec-
tive is to develop the right system for the organization. Implementing
the enterprise resource planning (ERP) system on time and on budget
is important, but it is more important to implement the right ERP sys-
tem. A project management steering committee is very important to ERP
implementation project success. This committee should include senior
management representing affected corporate functions, as well as repre-
sentative end users. This committee usually is involved in system selec-
tion, as well as monitoring project progress and management of external
consultants. Consultants provide experience missing from the organiza-
tion and can be invaluable. However, consultants should be screened to
avoid those with financial ties to software vendors and lack of experience
in the specific system being implemented.
Perhaps the single most decisive element of SCM installation success
or failure is the knowledge, skills, abilities, and experience of the project
90 SUPPLY CHAIN INFORMATION TECHNOLOGY

manager. An SCM installation project manager must understand both the

business and the technology. Private and public sector organizations are
increasing their use of enterprise resource planning systems (ERP), which
make integrated financial and human resources solutions available that
facilitate public-sector business processes. While procuring the right ERP
system is an important factor, the genuine challenge lies in implementing
these systems, which can be tremendously complex. Today’s ERP project
managers are faced with overwhelming challenges. As government and pri-
vate system users’ budgets have become leaner, project managers have to
achieve more with less in tighter time frames. This chapter addresses the
explicit needs of the private- or public-sector ERP project manager, with
wide-ranging knowhow in private- or public-sector project management.
Project management is one of the most important fields in informa-
tion systems. It is difficult to bring an information systems project to
completion on time, within budget, and meeting specifications. Reports
issued by the Standish Group based on surveys of IT companies repeat-
edly find that only about 15 percent come in on time and within budget.
For large companies, the success rate is lower. While ERP systems involve
a little more structure than the average IT project, there still are problems
encountered in implementing ERP. A typical problem is underestimation
of the time to get an ERP system working. However, there have been a
number of efforts to make this type of installation less problematic. One
major reason is that vendors have a vested interest in making ERP instal-
lation less risky and more predictable.

Implementation Process
Three broad approaches to the timing and location of ERP implementa-
tion include the pilot implementation approach, the Big Bang implemen-
tation approach, and the phased implementation approach:

• Pilot implementation approach: This approach starts with a

small-scale version applied to a small division or with one spe-
cific module, such as finance and accounting, with the intent
of seeing how that initial effort works before jeopardizing
the rest of the organization. The thought is to prioritize the
Supply Chain Software Installation Project Management 91

f­ unctional areas and to bring into operation that area offer-

ing the greatest advantage first. This requires an enormous
amount of interface programming to preserve the data flows
between the legacy system and the new module being imple-
mented. It is also the lowest risk alternative but also takes the
most time as each module is rolled out.
• Big Bang implementation approach: This requires simultaneous
implementation of multiple modules of an EIS package at one
time. Why is it called Big Bang? An organization prepares,
tests, trains, and everything else needed to get ready, and then
over a weekend or a few days the data in the old system is
migrated to the new one. One morning everyone in the com-
pany starts using the new system and the old one is simulta-
neously turned off. This is the most risky alternative. There
will always be unforeseen and unexpected events. Several
famous companies have been caught in this trap. Usually high
technology companies that thought it could not happen to
them found that it could. A variant of the Big Bang approach
is to combine it with a phased approach. This entails a series
of minibangs that affect a logical segment of the business. One
example uses a division-by-division approach where each one
uses a Big Bang to migrate to the new ERP system. A second
example might use a functional approach, on the other hand
this requires interfaces with both systems running their parts
of the company, that is, finance goes first with the new system
implemented in all divisions at one time, followed by manu-
facturing and customer support.
• Phased implementation approach: It consists of designing,
developing, testing, and installing different modules of the
EIS over time or rolled over different elements of the organi-
zation at different times.

Implementation Issues
ERP solutions ultimately help in ensuring that data is transparently avail-
able across the enterprise. The advantages of implementing a good ERP
92 SUPPLY CHAIN INFORMATION TECHNOLOGY

system are manifold. With its integrated applications, an ERP system

optimizes the core processes of an organization, accelerates transactions
with its business workflow, and makes strategic management informa-
tion available in a transparent form at all levels of the company, within
the framework of its information warehouse concept. An ERP system
guarantees strategic freedom in designing an organization’s informa-
tion management communication. This enables uniformity in storage
and restricted exchange of business data between two physically divided
application systems. Ready-to-wear solutions for more than a few hun-
dred business processes are available in an ERP solution that can be
promptly constructed using its business process such as modeling tools
to optimize the processes of an organization. With its business-oriented
functions, an ERP solution opens up new opportunities for improving
an organization’s market and customer orientation through data min-
ing techniques. The high level of flexibility is easy to get through ERP
systems and enables the flexibility to respond to a continually changing
market situation.
Where vendor software installation money is spent is of interest. In
the ERP field, two surveys1 in manufacturing industries found the results
shown in Table 6.1.
In the United States, vendors seem to take the biggest chunk of the
average implementation. Consultants also take a big portion. These
proportions are reversed in Sweden. The internal implementation team
accounts for an additional 14 percent (12 percent in Sweden). These pro-
portions are roughly reversed in Sweden with training.

Table 6.1  Enterprise information system installation project cost

proportions
Installation cost
proportion United States Sweden
Software 30% 24%
Consulting 24% 30%
Hardware 18% 19%
Implementation team 14% 12%
Training 11% 14%
Other 3% 1%
Supply Chain Software Installation Project Management 93

ERP or SCM Installation Project Risk

Managing risk on an ERP project is crucial to its success. A risk is a
potential failure point. An ERP project may have thousands, maybe even
millions, of potential failure points, in the form of untested technology
(and untested staff), political events, and even nature. When computers
interact with how humans do their jobs, often unintended consequences
occur. We can broadly categorize steps to manage risk:

1. Find potential failure points or risks.

2. Analyze the potential failure points to determine the damage they
might do.
3. Assess the probability of the failure occurring.
4. Based on the first three factors, prioritize the risks.
5. Mitigate the risks through whatever action is necessary.

Project team members must rely on their experience and advice from
others to find potential failure points or risks. Track through the entire
project plan and look for areas of ambiguity:

Step 1: One of the easiest and most effective ways to find potential failure
points is to talk to other organizations that have done the same
projects. Cost estimates are probably the most common potential
project failure point. Other potential failure points include lack of
an executive sponsor, an under-qualified project manager, and no
clear objectives for the project.
Step 2: The next step is to determine the severity of the potential failure on
the budget, project timeline, or the users’ requirements.
Step 3: Assessing the likely impact and the probability of the failure occur-
ring is more art than science, requiring in-depth knowledge of
both the EIS package and the business. A risk management team
should be built that brings together those individuals that have
the knowledge and experience to know what might happen. This
team must have experience in implementing the specific EIS
package for an organization approximately the same size and in
the same industry as yours.
94 SUPPLY CHAIN INFORMATION TECHNOLOGY

Step 4: Based on the first two factors, prioritize risks. Decide which risks
should be eliminated completely, because of potential for heavy
impact on critical business processes. Set up a monitoring plan for
risks that should have regular management attention. Make the
entire team aware of those risks.
Step 5: You mitigate risks by reducing either the probability or the impact.
The probability can be reduced by action up front to ensure that
a particular risk is reduced. The project risk plan should include
a set of steps to recover from each risk, should failure occur. The
team must know the person accountable for recovery from each
specific risk, and the action to be taken to resolve it. The team must
know the symptoms of the impending failure, and act to prevent it
from occurring if possible. An example is to test a particular operat-
ing system or hardware component to prove that it works prior to
going live. Doing a pilot implementation or prototyping the first
set of EIS inter-faces are both examples of risk mitigation.

Project Management
To demonstrate the relative aspects of installing various forms of ERP or
SCM, we will start with a simple critical path model (CPM) representing
selection of the SCM variant for an organization. Microsoft Project uses
the traditional CPM, which consists of a list of project activities, each of
these activity’s duration, and immediate predecessors. Microsoft Project
allows extending project management to resources required. Inputs are
given in Table 6.2.
This is a fairly straightforward sequence of activities, which can be graph-
ically displayed in a network, as shown in Figure 6.1. Networks also provide
a valuable visual aid for managers to identify relationships among activities.
The sequence of events here is clear—activities B and C can work
in parallel once activity A is accomplished. All other activities are
­sequential—they can’t begin until their predecessors are finished. A prede-
cessor relationship is captured by the critical path method. In reality, these
relationships are often not as rigid as the critical path method assumes.
For instance, analysts could anticipate and begin work on activity D
before the board approved the concept. Such an early start would run the
Supply Chain Software Installation Project Management 95

Table 6.2  Activity list for full enterprise information system

Activity Duration Result
A–Select consultant for selecting system 2 weeks None
B–Meet with consultant to discuss ERP 4 weeks A
C–Meet with Board of Directors to explain proposal 1 week A
D–Develop request for proposals to give to vendors 3 weeks B, C
E–Obtain vendor proposals 4 weeks D
F–Develop organization business cases including training 8 weeks E
G–Present business cases to Board of Directors 1 week F
H–Redo estimates in light of board requests for changes 3 weeks G
I–Initiate installation project 1 week H

B
A D E F G H I

Figure 6.1  Network for enterprise resource planning system selection

scenario

risk of wasting time if the board were to disapprove the proposal. But if
management considered this to be of low likelihood, and if the benefit of
getting a jump start on estimation seemed worth the risk, modifications
to the implied set of precedence relationships could be made. It is neces-
sary to understand specifically what the critical path method assumes in
order to make use of its output.
Another graphical outcome of the critical path method is a Gantt
chart, which displays the early start schedule versus time (Figure 6.2). A
schedule can be generated over a period of weeks based on the early start
implied for all activities.
Figure 6.2 gives the Microsoft Project Gantt chart for this project. A
Gantt chart shows the time periods when each activity is scheduled to
occur. The critical paths (project activities that must be completed on
time if the overall project is to finish on time) are identified by a color.
If everything went according to plan, this project would be completed
in 26 weeks. The activity list, estimated durations, and predecessor rela-
tionships are all the information items required to develop a CPM. That
96 SUPPLY CHAIN INFORMATION TECHNOLOGY

Figure 6.2  Schedule for enterprise resource planning system selection

scenario

also means that all other information like uncertain durations and limited
resources are assumed away in the critical path method. The initial step of
the critical path method is to generate the early start schedule.
Early Start Schedule: For every activity that has no unscheduled prede-
cessors, schedule the activity to start as soon as possible (either the project
start time—usually time 0 for reference—or the maximum early finish of
all predecessors). The critical path schedules are optimal with respect to
time. This process continues until all activities are scheduled. The early fin-
ish is the sum of the early start time plus the duration as shown in Table 6.3:
Late Start Schedule: The next phase of the critical path analysis is the
late start schedule. The late start schedule is the latest an activity can be

Table 6.3  Early start schedule for enterprise resource planning

system selection scenario
Early Early
Activity Duration Predecessors start finish Result
A 2 weeks None 0 2 Releases B, C
B 4 weeks A 2 6 Releases D
C 1 week A 2 3 Must be done
to start D
D 3 weeks B,C 6 9 Releases E
E 4 weeks D 9 13 Releases F
F 8 weeks E 13 21 Releases G
G 1 week F 21 22 Releases H
H 3 weeks G 22 25 Releases I
I 1 week H 25 26 Finishes project
Supply Chain Software Installation Project Management 97

scheduled without delaying project completion time. The final ending

time for the project can be some contract deadline, which may be differ-
ent from the early finish schedule, or the early finish project completion
time can be used. If the deadline is earlier than the project early fin-
ish time, the project is infeasible (can’t be completed on time with given
durations). If the deadline is later than the project early finish time, all
activities in the project will have slack or spare time. If the deadline coin-
cides with the project early finish time, there will be at least one critical
path, connecting activities in a chain with zero slack.
The late start schedule is calculated in reverse. Networks are not really
needed for development of early start schedules, but are very useful in
sorting out the relationships for late start schedules. Begin with the end
time (deadline or early finish time). All activities that do not appear on
the list of predecessors for unscheduled activities can be scheduled. The
late finish time will be either the project end time or the minimum of the
late start times for all following activities. While networks usually aren’t
required to do an early start schedule, they can be handy in sorting out
the abstraction involved in working backward during development of the
late start schedule. The late start schedule for our scenario is shown in
Table 6.4.

Table 6.4  Late start schedule for enterprise resource planning system
selection scenario
Late Late
Activity Duration Followers finish start Result
I 1 week None 26 25 Releases H
H 3 weeks I 25 22 Releases G
G 1 week H 22 21 Releases F
F 8 weeks G 21 13 Releases E
E 4 weeks F 13 9 Releases D
D 3 weeks E 9 6 Releases B, C
C 1 week D 6 5 Must be started
before A can finish
B 4 weeks D 6 2 Releases A
A 2 weeks B,C 2 0 Late start schedule
done
98 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 6.5  Calculation of slack for enterprise resource planning

project selection scenario
Early Early Late Late
Activity start finish start finish Slack Critical?
A 0 2 0 2 0 Yes
B 2 6 2 6 0 Yes
C 2 3 5 6 3 No
D 6 9 6 9 0 Yes
E 9 13 9 13 0 Yes
F 13 21 13 21 0 Yes
G 21 22 21 22 0 Yes
H 22 25 22 25 0 Yes
I 25 26 25 26 0 Yes

Here the only case where there were multiple early starts to compare was
for activity A. Activity A’s early finish was the minimum of the early start for
all activities that were followers of activity A (in this case activities B and C).
The minimum early start for those two activities was 2, so the earliest A could
finish without delaying the overall project would be the end of Week 2.
Slack is the difference between the late start and early start schedules
(it doesn’t matter which you use, because in both cases the difference
between start and finish is the duration). Those activities with zero slack
are critical. If they are delayed, the project completion time would be
delayed. There can be more than one critical path for a project, and the
project network presented in Figure 6.1 can be useful in ensuring identi-
fication of each critical path. Table 6.5 shows identification of slack.
Slack in the case exists for only one activity, C. One critical path of
activities, consisting of the chain of activities from A to I, has zero slack.
More complex projects will include slack for multiple activities.

CPM Models of Supply Chain Software Options

In Chapter 5, we considered a variety of means to obtain supply chain
software. The first option was to install a complete EIS vendor system,
including an SCM module. Table 6.6 gives a general list of activities,
some of which might not be used by particular options, but which serve
Supply Chain Software Installation Project Management 99

Table 6.6  Activity list for supply chain software installation

Activity Duration Predecessors
1. Meet with consultant None
2. Obtain vendor (provider) proposals 1
3. Business case 2
4. Obtain board approval 0 3
5. Form internal team 2 weeks 4
6. BPR 4
7. Develop sandbox 4
8. Train superusers 7
9. Set vendor software parameters 6
10. Phase 1 Installation 5,9
11. Phase 1 Testing 10
12. Phase 1 Load data 11
13. Phase 1 Go live 0 12
14. Phase 2 Installation 13
15. Phase 2 Testing 14
16. Phase 2 Load data 15
17. Phase 2 Go live 0 16
18. Phase 3 Installation 17
19. Phase 3 Testing 18
20. Phase 3 Load data 19
21. Phase 3 Go live 0 20
22. Phase 1 Train users 8, 11
23. Phase 2 Train users 8, 15
24. Phase 3 Train users 8, 19

as a general installation project framework. Durations would depend on

the option selected. Milestone activities all have zero durations. Forming
the internal team would take two weeks regardless of which option was
selected. All other durations vary by the specific option.
Duration data in Table 6.7 roughly demonstrate time differences in
the options discussed. Developing an in-house or open-source system
involves more internal development.
Activity 4 is an example of a milestone, an activity with zero duration.
This is an event, in this case triggering the development of an employee
Table 6.7  Activity durations by option
100

Full ERP 3-module

Activity vendor system vendor system SCM only In-house Open source ASP
1. Meet with consultant 1 week 1 week 1 week
2. Obtain proposals 4 weeks 4 weeks 4 weeks 1 week
3. Business case 10 weeks 8 weeks 5 weeks 10 weeks 5 weeks 5 weeks
4. Obtain board approval 0 0 0 0 0 0
5. Form internal team 2 weeks 2 weeks 2 weeks 2 weeks 2 weeks 2 weeks
6. BPR 12 weeks 9 weeks 5 weeks 15 weeks 8 weeks
7. Develop sandbox 5 weeks 4 weeks 2 weeks 3 weeks 2 weeks 5 weeks
8. Train superusers 6 weeks 5 weeks 4 weeks 1 week 3 weeks 6 weeks
9. Set vendor parameters 15 weeks 12 weeks 6 weeks 1 week
25. Development 26 weeks 5 weeks
10. Phase 1 Installation 3 weeks 2 weeks 1 weeks 6 week 2 weeks 1 week
11. Phase 1 Testing 4 weeks 3 weeks 2 weeks 12 weeks 5 weeks 1 week
12. Phase 1 Load data 3 weeks 2 weeks 2 weeks 2 weeks 3 weeks 3 weeks
13. Phase 1 Go live 0 0 0 0 0 0
14. Phase 2 Installation 3 weeks 2 weeks
SUPPLY CHAIN INFORMATION TECHNOLOGY

15. Phase 2 Testing 4 weeks 3 weeks

16. Phase 2 Load data 3 weeks 2 weeks
17. Phase 2 Go live 0 0
18. Phase 3 Installation 3 weeks
19. Phase 3 Testing 4 weeks
20. Phase 3 Load data 3 weeks
21. Phase 3 Go live 0
22. Phase 1 Train users 3 weeks 3 weeks 3 weeks 1 week 3 weeks 3 weeks
23. Phase 2 Train users 3 weeks 3 weeks
24. Phase 3 Train users 3 weeks
Supply Chain Software Installation Project Management 101

training program for an organization adopting the system. The network

for this project is given in Figure 6.3.
The Gantt chart from Microsoft Project for the full vendor system
with three phases is given in Figure 6.4, with the critical path displayed in
red in Microsoft Project (dark gray in Figure 6.4).
Project slack is displayed with bars for noncritical activities. These
slacks can be calculated in Excel as shown in Table 6.8.
In this case, one critical path consists of activities 1–4, 6, 9–11, and
22. It is possible to have parallel sets of critical activities in more than one
path. Looking at the list of critical activities will not automatically identify
the critical path. This list needs to be considered in light of the network.
Shared slack and independent slack are the two kinds of slack. Shared
slack is slack that is shared across more than one activity. For instance,
both Activities 7 and 8 have 8 weeks of slack. This implies that some spare
time is available in the accomplishment of these activities. However, if a

5 10 11
12
1 2 3 4
6 9 13

7 8 22

Figure 6.3  Network for framework with one phase

Figure 6.4  Microsoft project display for partial vendor (1-phase)

system
102 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 6.8  Calculation of slack for supply chain management only

system
Early Early Late Late
Activity Duration start finish start finish Slack Critical?
1. Meet with 1 0 1 0 1 0 Yes
consultant
2. Obtain 4 1 5 1 5 0 Yes
proposals
3. Business case 5 5 10 5 10 0 Yes
4. Obtain board 0 10 10 10 10 0 Yes
approval
5. Form internal 2 10 12 19 21 9 No
team
6. BPR 5 10 15 10 15 0 Yes
7. Develop 2 10 12 18 20 8 No
sandbox
8. Train superusers 4 12 16 20 24 8 No
9. Set vendor 6 15 21 15 21 0 Yes
parameters
10. Phase 1 1 21 22 21 22 0 Yes
installation
11. Phase 1 testing 2 22 24 22 24 0 Yes
12. Phase 1 load 2 24 26 25 27 1 Yes
data
13. Phase 1 go live 0 26 26 27 27 1 Yes
22. Phase 1 train 3 26 29 24 27 0 Yes
users

week of delay were encountered in Activity 7, this would reduce the time
available for Activity 8 as well. That is because it is the same 8 weeks of
spare time in this case. Activity 5 has 9 weeks of independent slack.
Schonberger recommended focusing on scheduling the critical chain
of activities closely, to make sure that they have the resources needed to
proceed as scheduled.2 Goldratt adopted the same view.3 The critical chain
of activities includes those activities that are critical (as long as managerial
control can influence their duration) but is not limited to these activities.
Activities with very little slack can become problems if they are delayed
up to or beyond their slack. Therefore, the slack of noncritical activities
Supply Chain Software Installation Project Management 103

Table 6.9  Supply chain software alternative model results

Slack— Slack—
Form Develop
internal sandbox/
team train Finish date Duration
Full ERP 25 weeks 26 weeks 6/7/2013 75 weeks
vendor system
3-module 19 weeks 19 weeks 12/21/2012 51 weeks
vendor system
SCM only 9 weeks 10 weeks 7/20/2012 29 weeks
In-house 60 weeks 57 weeks 5/17/2013 72 weeks
Open source 24 weeks 18 weeks 8/3/2012 31 weeks
ASP 12 weeks 0 5/18/2012 20 weeks

should also be monitored, to make sure that new critical activities are
identified.
We ran Microsoft Project models for each of the six systems. Com-
parative results are shown in Table 6.9.
Table 6.9 demonstrates a bit of the trade-off among different systems.
More complex systems obviously are going to require longer installation
projects. ASP projects are probably going to be the fastest to install. In-
house systems can usually be expected to take the longest, although here
our numbers show the full vendor ERP to take slightly longer, due to
predecessor relationships imposed on the phases. There will be far greater
duration uncertainty in the in-house and open-source options.
Projects have a bias in that activity delays accumulate, but any activ-
ities that finish early have to wait on other (slower) activities.4 This is
because when an activity is late, those that must wait for it to be com-
pleted start later than scheduled. On the other hand, if an activity should
be finished before it was scheduled to finish, the advantage rarely can be
used, because in complicated projects different crews and materials have
to be gathered, and many different people need to be coordinated. The
early finish time is not usually known much prior to the activity’s com-
pletion. Therefore, it is very difficult to gather all the following activities’
resources together in time to start early.
The following case demonstrates some of the difficulties encountered
in implementing software projects within organizations.
104 SUPPLY CHAIN INFORMATION TECHNOLOGY

Enterprise Resource Planning Project Problems in

Nevada Department of Motor Vehicles
The Nevada Department of Motor Vehicles (DMV), like most such
organizations across the United States, sought to increase the effi-
ciency of their service to taxpayers through automation. Nevada has
been the fastest growing U.S. state in population for 15 consecutive
years, reaching almost 2 million people (about 1.7 million of them in
Las Vegas) by 2000. Nevada’s DMV employed about 2,200 people in
36 offices in 1999, responsible to enforce statutes relating to motor
vehicles and watercraft.
In 1999, the DMV handled over 130,000 vehicle registration
renewals and 10,000 new vehicle registrations per month, in addition
to 30,000 license renewals and 6,000 new driver licenses per month.
The length of time customers had to wait was noticeably increasing.
The DMV sought to improve cost, speed, and service quality.
The Nevada DMV adopted Project Genesis in 1996, a seven-year
upgrade of 20-year-old legacy computer systems. These legacy systems
were altered and patched with the intent of dealing with the exploding
workload, but they were unable to keep up. Separate systems han-
dled registration and titles and driver’s license information. This led
to the need for multiple updating, and often customer information
was not current, even though citizens had just updated data on one of
the systems. There often were computer crashes, and technicians were
not trained to work on both systems, meaning that citizens requiring
service in both systems entered a second line as soon as their wait in
the first line was over. Expected benefits were reduction in new hiring
and improved customer service.
The project cost the Nevada DMV $34 million, completed in 2003.
The system initially went online September 7, 1999. The first phase of
the project included system development, continuous improvement,
organizational change, and change management. A detailed plan of
integration was generated, and vendor products explored. The sec-
ond phase built on the first phase with the intent of providing one-
stop service. The output of Phase 2 was a core system, with kiosks to
Supply Chain Software Installation Project Management 105

give citizens information about driver’s license, registration, and title

requirements. A phone-processing center was created to answer citi-
zen calls. Phase 3 continued the process by adding digital document
imaging, online and telephone registration, and renewals by outside
vendors.
The project was initially scheduled to go live in July 1999. In Octo-
ber 1998, all 500 DMV technicians were trained on the new processes.
Two employees from each DMV were sent to extensive training of
6 months on the new system, while the rest of the technicians received
an eight-hour course. This training continued through August 1999.
Conversion was expected to take 3 days and was to be done on a
three-day holiday weekend. As the launch date neared, it was delayed
until early September due to unresolved bugs. This led to forcing out
the DMV deputy director and heavy press and politician interest.
There were still bugs in early September, but the governor insisted on
going live.
The premature implementation was a disaster. Employees did not
know how to use the system, and customer waiting time increased
to hours. The DMV reverted to the old system (decided by the new
deputy director) on September 7. The state legislature subcommittee
in charge met in early October, agreeing that the new system had too
many bugs. But the governor stated that abandoning Project Genesis
was not an option. He announced a remedy plan involving hiring 42
new workers, 24-hour shifts to catch up with mail-in registration back-
log, a 30-day grace period for police tickets for registration or license
renewals, a telephone hotline, and Internet and telephone technology
for registration. These steps were to be implemented by June 2000.
In November, average wait times in Las Vegas were reduced to
around 2.5 hours (in the old system this transaction took 4 minutes,
under Project Genesis this service time increased to 15 minutes).
The Genesis Project had been authorized by a legislative appropria-
tion of $17.8 million in 1997. This was increased by $8.3 million in
1999. By October 1999, $25 million had been spent. By November
2002, DMV officials claimed that they had not exceeded their budget.
However, these costs did not include impact on citizens.
106 SUPPLY CHAIN INFORMATION TECHNOLOGY

This project seems to be quite typical. Implementation encountered

a great deal of difficulty because a great deal of new programming and
system installation needed to be accomplished, making these projects
highly difficult to estimate in terms of time (and that impacts money).
Typically cost overruns occur, although IT personnel usually find a
way to justify some statement to the effect that they are within budget.
Source: Adapted from Dhillon and Caldeira (2008).

Conclusion
Proper planning and management is very important in SCM software
implementation. Project management in the implementation of such
software includes requirements to accomplish the following:

(a) Software and hardware selection

(b) Business process reengineering to gain effective advantage from the
new system
(c) Assessment of the ERP or SCM readiness of the organization and
plan change management to make the new system effective

Proper project management includes the selection of an effective pro-

ject management team. Implementing an EIS is not an inconsequential
effort. Considerable attention should be given to the preliminary stages
of planning. User requirements and selected functionality should be
communicated to all involved in the project. Critical success factors need
to be considered to carefully coordinate the efforts of the many people
involved, to include consultants and managers. Gaining employee com-
mitment to the EIS project is very important. Because the EIS integrates
diverse company elements and data from many departments, the effects
of delays ripple with dramatic impact. Therefore, control of the EIS
implementation project is paramount.
CHAPTER 7

Recapitulation
This concluding chapter discusses three issues related to current events in
enterprise systems. We want to emphasize the importance of training in
obtaining effective use of enterprise resource planning (ERP) systems, supply
chain management (SCM), advance planning systems (APSs), or electronic
information systems (EISs). ERP systems have been around long enough and
have had sufficient research leading to improved systems that upgrades have
become important. This creates great pressure on organizations that perhaps
spent billions on massive systems in the 1990s, now finding that vendors
are suggesting they go through another round of massive installation and
retraining with significant capital requirements. Upgrades are encouraged by
vendors through dropping service on their older systems. (SAP announced
around 2004 that they were discontinuing service on their flagship R3 sys-
tem as of 2007. This was followed by client outcries, resulting in postpone-
ment of discontinued service until 2011.) A final topic is the evolution of
added functionality. In the past, systems such as APS or customer relationship
management (CRM) were added to ERP systems, with software provided by
external vendors. This was changed when Oracle purchased Siebel Systems,
the leading CRM vendor around 2005. Oracle thus made CRM a module
within their ERP. SAP responded by purchasing their own CRM to make
into a module. The same was done with SCM systems, to include APSs.

Training
In any supply chain software implementation, it is generally understood
that training is a key component of organizational change management
and of the overall success of the implementation. Many important issues
remain in making SCM systems work. User training has shown up as a
critical success factor in the implementation of an ERP in many studies.1
Managers often underestimate the magnitude required in such a training
108 SUPPLY CHAIN INFORMATION TECHNOLOGY

program. Training is typically underestimated, and is often the first target

for budget cutting. A period of about one year is usually required until
the trauma of new system implementation passes.This difficult period is
easier to cope with if a good, thorough training program is adopted. Fur-
thermore, those organizations that do a poor job of training have been
found to have poorer performing enterprise systems.2
Good training programs can pay off in many ways. Gartner has
claimed that each hour of effective training is worth five hours to the
organization because well-trained users take less than a quarter of the time
to reach productive performance levels, they require less assistance from
help sources, and they spend less time correcting errors.
Thus SCM training programs focus on transactional training (how
the system works). SCM software companies and implementation teams
are normally very good at delivering training that teaches employees how
to accomplish transactions in the system. On the other hand, running
a business entails much more than simply implementation transactions
within a software program. SCM training programs should spotlight on
new business processes.

Training Problems

EIS software itself is rarely the source of implementation problems. Poor

training of users is usually the source of most implementation problems.
Organizations with higher proportions of new employees may find imple-
mentation of EIS easier. Firms with many employees with many years of
experience within the firm prior to EIS implementation require greater
levels of change. Conversely, managerial and professional employees are
often easier to convince of the positive impact of EIS on organizational
effectiveness. Furthermore, the degree of change required within the
organization can have an impact on EIS installation timing. If the system
is implemented too quickly, this may not provide sufficient time for the
organizational climate to change.
Rarely do EIS implementations run smoothly. Some of the pitfalls
organizations typically face are:

• placing employees in software-specific training, without atten-

tion to business processes;
Recapitulation 109

• focusing training on command sequences without explanation

of why skimping on training time; and
• continuing tendency of new users to solve problems the old
way rather than learn the new system.

Training Media

A number of tools are available to deliver user training. One-way channels

included newsletters, road shows, town meetings, a website, and personal
appearances by key leaders to inform employees of what was developing in
their IT. Interactive communication included workshops, meeting to deal
with specific issues, conference calls, and collaboration websites. Hands-on
interaction was also developed, to include sandboxes enabling users to play
with the system using simulated data prior to using the real system.
Some of the reasons training in new EIS systems is difficult include
user diversity, the complexity of the new system, and the variety of train-
ing methods available. By their nature, EIS systems are going to radically
change how many people do their jobs. The theory of EIS is to inte-
grate computer support to all aspects of the business, naturally leading
to user diversity. These people also are busy, especially in coping with the
requirements of the new system. Training users in new EIS systems can
be extremely expensive, usually over 10 percent of total EIS system cost.
The need for flexibility in timing and place as well as the need for
training in specific functions rather than the comprehensive EIS system
have made it important to have flexible training delivery means. This has
led to an entire industry providing EIS training. Many delivery formats
are available, including:

• web-based virtual training;

• computer-based training;
• video courses;
• self-study books;
• training manuals;
• pop-up help screens;
• classroom training; and
• sandboxes, or prototype systems using simulated data for
hands-on orientation.
110 SUPPLY CHAIN INFORMATION TECHNOLOGY

Enterprise system training should be conducted during business hours to

indicate its importance.3 Vathanophas saw three levels of training, where
consultants and vendors can first train IT staff, who in turn train indi-
vidual departmental representatives (sometimes called superusers), who
finally deliver training to their compatriots within their departments.
The scope of training is demonstrated by the experiences of Pratt
and Whitney, Canada (P&WC) in 1998.4 They trained 110 employees
from their six most affected departments as internal trainers (superusers).
The year 1998 saw P&WC convert their facilities into a massive class-
room, training over 3,000 employees in both technical aspects (system
navigation and task training) delivered by consultants as well as providing
business-oriented training (processes and tasks). P&WC created over 150
manuals to cover diverse user needs.

Upgrades
Upgrades are mainly intended to take advantage of new technologies and
business strategies to ensure that the organization keeps up with the latest
business development trends. Therefore, the decision to upgrade SCM
and related systems is usually not driven by code deterioration or antici-
pated reduction in maintenance costs alone but by different purposes.
According to an AMR study, 55 percent of ERP upgrades were volun-
tary business improvements triggered by the need for new functionality,
expansion, or consolidation of systems; 24 percent of upgrades were trig-
gered by technology stack changes; 15 percent of upgrades were forced by
discontinued support of the running version of software to avoid vendor
support termination; and 6 percent of upgrades were triggered by bug
fixes or statutory changes.
The cost of upgrades is high. Upgrade costs may involve 50 percent
of the original software license fee and 20 percent of the original imple-
mentation cost per user, which means over 6 million dollars for a 5,000-
user system. Typically, each ERP upgrade requires eight to nine months
of effort with a team the equivalent of one full-time employee per 35
business users. The adopting organization does not have to develop and
rewrite the system itself, but rather it replaces (or upgrades) the old ver-
sion with a readily available new version from the vendor. However, a
Recapitulation 111

lack of experience may cause the costs and length of the upgrade project
to approach or even exceed those of the original EIS/ERP implementa-
tion effort. General benefits for organizations from EIS/ERP upgrades
include:

• Eligibility for help-desk support. Most of software vendors stop

providing technical support 12–18 months after the next
version becomes available. Therefore, keeping upgrade with
the pace of vendors will guarantee the support for the system
from the vendors.
• Solutions for outstanding bugs or design weaknesses. It is impos-
sible to guarantee spotless and error-free systems after the
implementations even though vendors will conduct many dif-
ferent testing processes to eliminate the occurrence of errors
in the system before the leasing time.
• New, expanded, or improved features. Software provides organi-
zations the knowledge and strength (i.e., best practices) from
the vendors. Upgrades provide organizations future enhance-
ment from the vendors to give the organizations better
opportunities to catch up the current business development,
improve their processes and build more efficient business
models with new functions, new features and new processing
styles provided in the upgraded versions.

Add-ons
Add-on (or bolt-on) is ERP jargon for third-party applications. More
specifically, an add-on is an execution system providing very specific
functionality or technology to complement ERP software. Many useful
applications of this type are available. The types of software and related
features of add-on software listed by Microsoft for their ERP software are
shown in Table 7.1.
Table 7.1 shows a variety of functions that can still be supported by
add-ons. In the 1990s, major functions were supported, such as SCM
and CRM. The evolution in ERP systems has seen these major functions
pulled into more integrated ERP systems. However, there will always
112 SUPPLY CHAIN INFORMATION TECHNOLOGY

Table 7.1  Microsoft ERP add-ons

Add-on function Vendor
Automotive ERP AIM Computer Solutions, Inc.
Distribution, financial, e-commerce Alba Spectrum
integration
Sales and use tax Avalara
e-commerce Azox
Automated EDI, XML processing Data Masons Software
Project tracking, financial Encore Business Solutions
Electronic invoicing Enliven Software
Support Excel translation to Dynamics GP Infinia Business Technology
Payroll and human resources Integrity Data
Paperless ERP support Metafile Information Systems
Bar code data capture Panatrack, Inc.
Document imaging PaperSavePro
Project resource management Tenrox
Batch manufacturing support Vicinity Manufacturing

be ideas to supplement ERP systems, some of which will prove com-

mercially viable. A snapshot of some of those systems is demonstrated
by Table 7.1.
Support of CRM is the form of data mining most commonly asso-
ciated with ERP. CRM allows businesses to identify the profitability of
specific customers, and to increase chances of retaining them. This is
accomplished by having all relevant information readily available that is
needed for planning, product, and service throughout the customer life
cycle. SAP has been a leader in enhancing their product’s abilities to sup-
port CRM.5 Many of these systems failed, as they introduced the need for
middleware, or software that translates data from one vendor system to
another, creating an added layer of complexity and expense.
Naturally, ERP vendors added functionality such as SCM and CRM
to more efficiently utilize their systems. As we have mentioned, that is
what Oracle did when they purchased Siebel Systems’ CRM product in
September 2005 and integrated it within their ERP (thus creating an EIS
in industry jargon). Therefore, add-ons became modules through acquisi-
tion. Clients benefited by elimination of the need for middleware for that
Recapitulation 113

application. However, realistically, there will always be add-on products

of some type generated by the active software development industry.

Green SCM in Taiwanese Textiles6

Modern textile manufacturing involves a high level of chemical use. Tai-
wan has a number of high-tech operations, including textiles at the high
end of the market. This industry tends to involve labor-intensive small
operations working in supply chains. Lai et al. studied implementation
of green supply chain information systems in three Taiwanese textile
operations.
Green SCM involves the design, planning, execution, control, and
monitoring of activities across the supply chain with the intent of creat-
ing net value, a competitive infrastructure leveraging global logistics, syn-
chronizing supply and demand across the supply chain, and measuring
performance. A green supply chain needs to consider:

• Green design in the use of natural, organic, and recyclable

material as much as possible to reduce waste;
• Green purchasing to restrict use of hazardous substances;
• Green production to preserve resources, reduce consumption
of new raw material, and restrict the use of toxic substances as
well as minimizing negative impact on the environment;
• Consideration of the entire product life cycle, to include con-
sideration of recycling and waste disposal.

The study involved questionnaires administered to three Taiwanese tex-

tile manufacturers. These organizations were experiencing problems in
information availability, timeliness of ecological information, and price
competition. Green SCM system improvements were expected through
more timely information exchange (using EDI rather than telephone,
fax, or e-mail), and improved marketing and auditing. Key performance
indicators included increasing the sale of green products, reduction of
complaints due to environmental concerns, faster information retrieval
with respect to environmental issues, shorter procurement lead-time, and
elimination of low cost competition.
114 SUPPLY CHAIN INFORMATION TECHNOLOGY

The primary benefits of green supply chain information systems in

Taiwanese textiles were found to by external effects in promoting cor-
porate image, increasing customer loyalty (and value), reduction of cus-
tomer complaints, and better conformity of products to global standards.
Internal benefits included increased sales, more efficient procurement,
and better competitiveness.

Conclusion
Training is a key component of a successful enterprise system installa-
tion. Training needs to be considered in the initial project budget. Typi-
cally, it is underestimated by significant amounts. There are two major
elements of enterprise system training. The first is focused on how to use
the system, and this type of training is well-developed by vendors and
consultants. The second is on organization specific business processes.
This second form of training has proven to be far more important than
the first. Vendors and consultants can’t be expected to deliver training
programs covering organization-specific processes unless the installed sys-
tem has no customization. Usually, effective systems that match organiza-
tional needs do have customization, and the organization itself will have
to develop this form of training. (They will want to if it covers core com-
petencies that yield competitive advantage to the organization.)
An effective means to organize training is to have experts (vendors or
consultants) train IT staff. IT staff in turn train a set of superusers from
departments within the organization, who then relay the knowledge they
obtain to general organizational users.
There are many different media available to deliver enterprise system
training. One-way media can be used to inform users of the system’s
value to the organization. Two-way media are usually more effective in
teaching users how to use the system. Hands-on interaction with sand-
box systems can be highly effective in training users of their specific job
requirements.
Through care in the planning and delivery of training, the success rate
of enterprise systems installations can be vastly improved.
EIS/ERP upgrade projects have grown in importance, as vendors are
seeking to generate revenue through improved systems. The reticence of
Recapitulation 115

vendors to support old systems was noted by multiple organizations in

this study. (The value of improved functionality was also noted.)
Upgrade projects seem to be much more controllable than initial
SCM software installation projects. This should be expected due to the
experience organizations gain with their original systems. All the organi-
zations seemed to do something that fit the theoretical model of an
upgrade project that we used. Assessment, planning, and action phases
were present to at least some degree. The renewal phase noted by the 15
organizations involved very smooth turnover. A limitation of the study is
that future implications were not yet available in all cases (problems may
crop up later), although all organizations credited strong planning and
project management as ways to assure smooth transitions.
The software industry continues to generate new applications, and
improvements on existing applications. That is progress. Large vendors of
software will add such systems (or develop their own), leading to the need
for upgrades and renewing their revenue stream. Smaller vendors such as
Sage and Lawson may not add as many of these functionalities, so that
there will be an increasing variety of supply chain software varieties avail-
able, calling for more complicated software selection decisions, to include
open-source options. The price of progress is often more complexity.
Notes
Chapter 1
  1. Ptak and Smith (2011).
  2. Manetti (2001).
  3. Moser and Ward (2008).
  4. Gonzalez (2007).
  5. Saenz de Ugarte, Artiba, and Pellerin (2009).
  6. Olson and Kesharwani (2010).
  7. Olson (2004).
  8. Mabert et al. (2000); Olhager and Selldin (2003); Katerattanakul et al. (2006).
  9. Wang, Chen, and Xie (2010).
10. Wang et al. (2010).

Chapter 2
  1. Fishman (2006).
  2. Holzner (2006).
  3. Brady, Monk, and Wagner (2001).
  4. Mabert, Soni, and Venkataramanan (2000); Olhager and Selldin (2003).
  5. Stevens (2001).
  6. Davenport (1998).
  7. Davenport (1998).
  8. Stadtler (2005).
  9. Wiers (2009).
10. Rudberg and Thulin (2009).

Chapter 3
  1. Schwartz (2003).
  2. “Outsourcing’s next generation” (2003).

Chapter 4
  1. Hall, Rosenthal, and Wade (1993).
  2. Scott and Kaindle (2000).
118 Notes

  3. Walker (2010).
  4. Hammer and Stanton (1999).

Chapter 5
  1. Kwahk and Ahn (2010).
  2. Keen (1988).
  3. Olson (1996).
  4. Edwards (1977).
  5. Perera and Costa (2008).
  6. Olson (2011).

Chapter 6
  1. Mabert, Soni, and Venkataramanan (2000); Olhager and Selldin (2003).
  2. Schonberger (1981).
  3. Goldratt (1997).
  4. Goldratt (1997).

Chapter 7
  1. Ngai and Law (2008).
  2. Tsai and Hung (2008).
  3. Vathanophas (2007).
  4. Swanton (2004).
  5. Olson and Shi (2006).
  6. Lai, Hsu, and Chen (2012).
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Index
Add-ons, 111–113 Capital replenishment, 81
Advanced planning systems (APS), Clean-slate reengineering
7–8 definition, 62
modules, 36–37 vs. technology-related
standalone, 42 reengineering, 63
in Swedish seed distribution, Concurrent transformation, 63
37–39 Cost
Alternative software sources, 48 computer platform, 70
Application service providers, 44 of customization, 70
APS. See Advanced planning systems of implementation, 70
Automated business process, 60–61 obvious, 69
safeguarding, 70
Best-of-breed approach, 27–28, 44 of system integration, 69–70
Bill of materials (BOM) training, 70
definition, 28 Cost-benefit analysis, 71–72
for roadsters, 31 CPM. See Critical path model
for sedans, 30 Critical path model (CPM), 94,
for SUVs, 32 98–103
top-level quantities required, 33 CRM. See Customer relationship
for towncars, 31 management
BOM. See Bill of materials Customer ordering process, 64–65
BPR. See Business process Customer relationship management
reengineering (CRM), 3
Business process reengineering (BPR) Customized vendor ERP systems, 43
automated business process,
60–61 Digital warehouse management
best practices, 61–62 system (DWMS)
clean-slate reengineering, 62 components, 17
description, 57–58 implementation
infrastructure processes, 58 forklift guidance, 18
manual buisness process, 59–60 requirements analysis, 18
operational processes, 58–59 rule management, 18
supply chain system design, 18
customer ordering process, warehouse layout design, 18
64–65 warehouse process analysis,
distribution center management, 17–18
65–66 and RFID, 19
forecasting, 66 Distribution center management,
information technology, 66 65–66
peak inventory build process, 65 DWMS. See Digital warehouse
plant run strategy, 65 management system
124 Index

EIS. See Enterprise information Net present value (NPV), 72–74

systems NPV. See Net present value
Enterprise information systems (EIS),
11 Obvious cost, 69
Enterprise resource planning (ERP) Open-source ERP systems, 44–45
applications, 16–17 Open-source supply chain software,
best-of-breed approach, 27–28 45–47
customized vendor systems, 43 Operational processes, 58–59
description, 10–12 Outsourcing supply chain
features, 12 management software, 45
federalization approach, 28
full vendor systems, 42–43 Payback period, 74–75
implementation, 13–15 Peak inventory build process, 65
modules, 24–25 Physical distribution, 3
open-source systems, 44–45 Procurement, 3
pros and cons, 14 Product development, 2
qualitative features, 78
relative module use, 24, 26–27
and supply chain management, 16 Radio-frequency identification
supply chain software issues, (RFID), 8
85–87 RFID. See Radio-frequency
ERP. See Enterprise resource planning identification

Federalization, 28 Safeguarding cost, 70

Forecasting BPR, 66 Sensitivity analysis, 75–76
Full vendor ERP systems, 42–43 Simple multiattribute rating
technique (SMART), 81–82
SMART. See Simple multiattribute
Green SCM, Taiwanese textiles,
rating technique
113–114
Standalone advanced planning
systems, 42
Infrastructure processes, 58 Supply chain business process
reengineering
Labor policies, 81 customer ordering process, 64–65
distribution center management,
Manual buisness process, 59–60 65–66
Manufacturing, 3 forecasting, 66
Manufacturing execution systems information technology, 66
(MES), 8–9 peak inventory build process, 65
Materials requirements planning plant run strategy, 65
(MRP), 5–7, 28–36 Supply chain information systems
MES. See Manufacturing execution advanced planning systems, 7–8
systems enterprise resource planning, 10–17
MRP. See Materials requirements manufacturing execution systems,
planning 8–9
Multiple criteria analysis, 81–82 materials requirements planning,
Multiple objective analysis, 81–85 5–7
Index 125

transportation management pilot implementation approach,

systems, 9–10 90–91
warehouse management project management, 94–98
systems, 8 Swedish Farmers Supply and Crop
Supply chain management (SCM) Marketing Association, 37
software options Swedish seed distribution, 37–39
application service providers, 44
best-of-breed approach, 44 Taiwanese textiles, green SCM,
customized systems developed in- 113–114
house, 42 TCO. See Total cost of ownership
customized vendor ERP systems, Technology-related reengineering
43 vs. clean-slate reengineering, 63
full vendor ERP systems, 42–43 definition, 62–63
open-source ERP systems, TMS. See Transportation management
44–45 systems
standalone APS, 42 Total cost of ownership (TCO),
vendor modules, 43 69–70
Supply chain process Training cost, 70
customer relationship Training programs
management, 3 media, 109–110
manufacturing, 3 problems, 108–109
physical distribution, 3 Transportation management systems
procurement, 3 (TMS), 9–10
product development, 2
Supply chain software installation
Upgrades, 110–111
project management
Big Bang implementation
approach, 91 Value analysis, 76–80
critical path model, 98–106
implementation issues, 91–92 Warehouse management systems
managing risk, 93–94 (WMS), 8
phased implementation approach, WMS. See Warehouse management
91 systems
OTHER TITLES IN OUR SUPPLY AND OPERATIONS
MANAGEMENT COLLECTION
Johnny Rungtusanatham, The Ohio State University, Editor

• Global Supply Chain Management by Matt Drake

• Managing Commodity Price Risk: A Supply Chain Perspective by George A. Zsidisin
• Improving Business Performance With Lean by James Bradley
• RFID for the Supply Chain and Operations Professional by Pamela Zelbst
• Insightful Quality: Beyond Continuous Improvement by Victor Sower
• Sustainability Delivered Designing Socially and Environmentally Responsible Supply Chains
by Madeleine Pullman
• Strategic Leadership of Portfolio and Project Management by Timothy J. Kloppenborg
• Sustainable Operations and Closed-Loop Supply Chains by Gilvan Souza
• Mapping Workflows and Managing Knowledge Capturing Formal and Tacit Knowledge to Improve
Performance by John Kmetz
• Supply Chain Planning: Practical Frameworks for Superior Performance by Matthew Liberatore
• Understanding the Dynamics of the Value Chain by William Presutti
• An Introduction to Supply Chain Management: A Global Supply Chain Support Perspective
by Edmund Prater
• Project Strategy and Strategic Portfolio Management: A Primer by William H. A. Johnson
• Sourcing to Support the Green Initiative by Lisa Ellram
• Designing Supply Chains for New Product Development by Antonio Arreola-Risa
• The Management and Improvement of Business Processes: Approaches, Models, Techniques
by Kaushik Sengupta
• Project Management Made Easy: A Practical Guide for Executives and Professionals
by Nand Dhameja
• Metric Dashboards for Operations and Supply Chain Excellence by Jaideep Motwani and Rob Ptacek
• Statistical Process Control for Managers by Victor E. Sower

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M. Johnny Rungtusanatham, Editor
EBOOKS FOR Second Edition
BUSINESS STUDENTS David L. Olson
Curriculum-oriented, born-

Supply Chain
digital books for advanced The rapid growth in computer technology provides
business students, written supply chain managers with valuable tools to better
by academic thought coordinate and control their operations. This book
leaders who translate real-

Information
seeks to describe systems available to give supply
world business experience
into course readings and chains information system support, demonstrating
reference materials for key tasks with demonstrated analytic techniques.

Technology
students expecting to tackle This second edition provides you with newer cases to
management and leadership demonstrate concepts that will allow to better manage
challenges during their
your supply chain management position in one of the
professional careers.

SUPPLY CHAIN INFORMATION TECHNOLOGY

fastest growing fields in our economy.
POLICIES BUILT
BY LIBRARIANS David L. Olson is the James & H.K. Stuart Professor Second Edition
• Unlimited simultaneous in MIS and Chancellor’s Professor at the University
usage of Nebraska. He has published research in over 150
• Unrestricted downloading
and printing refereed journal articles, primarily on the topic of mul-
• Perpetual access for a tiple objective decision making, information techno-
one-time fee logy, supply chain risk management, and data mining.
• No platform or
He teaches in the management information systems,
maintenance fees
• Free MARC records management science, and operations management
• No license to execute areas. He has authored 18 books; is associate editor of
The Digital Libraries are a Service Business, Decision Support Systems, and Decision
comprehensive, cost-effective Sciences; and is the co-editor in chief of International
way to deliver practical
David L. Olson
Journal of Services Sciences. He has given over 200 pre-
treatments of important
sentations at international and national conferences
business issues to every
on research topics. He was a Lowry Mays endowed Pro-
student and faculty member.
fessor at Texas A&M University from 1999 to 2001, was
named the Raymond E. Miles Distinguished Scholar
award for 2002, and was a James C. and Rhonda
For further information, a
Seacrest Fellow from 2005 to 2006.
free trial, or to order, contact: 
[email protected]
www.businessexpertpress.com/librarians
Supply and Operations
Management Collection
M. Johnny Rungtusanatham, Editor
ISBN: 978-1-63157-055-1