Olson, D. (2014). Supply chain information systems.

En Supply chain information

technology ( pp. 1 - 21 ) ( 180p. ) ( 2a ed ). [s.l.] : Business Expert Press. (C53747)

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 services.
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, Walmart has been very successful in the past in linking thou-
sands of sources with their millions of customers. Organizations such
as Bank of America have viewed their service operations as key to their
success and evaluate 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 became a common term in the 1980s, heavily
influenced by Japanese manufacturing processes such as those developed
by Toyota, such as just-in-time (JIT) and lean manufacturing. In the
1990s electronic data interchange (EDI) made it possible to coordinate
chains of organizations worldwide. This enabled integration of participant

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2 SUPPLY CHAIN INFORMATION TECHNOLOGY

supply chain elements into cooperative components sharing informa-

tion and enabling coordinated planning, operations, and monitoring of
performance. There was a focus on core competencies, abandoning 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 service. Agile supply
chains such as Motorola and Panasonic are flexible, enabling changing
the set of partners for given markets, regions, or channels, accessing the
specific price/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 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/partnerships
• Manufacturing
• Physical distribution
• Customer relationship management (CRM)
• Performance measurement

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.
Procurement (sourcing) involves selection of supply chain members. This
can be for specific products or services, so that an organization like Walmart

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SUPPLY CHAIN INFORMATION SYSTEMS 3

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 organization. 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 com-
municate 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 transpor-
tation 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 performance
is needed. Some of the key measures of effective supply chain manage-
ment include cost, service, productivity, use of assets, and quality. This is
often implemented through monitoring customer perceptions and identi-
fying best practices as benchmarks to evaluate supply chain performance.

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

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4 SUPPLY CHAIN INFORMATION TECHNOLOGY

one of the six elements given earlier. Each supply chain organization will
find that they are best served by various combinations of these software
products. Furthermore, as technology evolves, new software is developed
to serve specific needs as information systems continue to evolve.
A supply chain management stream can be divided into three main
streams: product, information, and finances.

• Product—Goods moving from sources through manufacturing

processes and ultimately on to a customer, to include services
such as customer returns.
• Information—Transmitting orders and updating delivery status.
• Finances—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 com-
petition, and strain on supply chains. Supply chain management (SCM)
software links suppliers to databases that show forecasts, current inventory,
shipping, or logistics time frames within the customer organization. By giv-
ing this access to suppliers, they can better meet their customers’ demands.
For example, the suppliers can adjust shipping to make certain that their
customers have the inventory necessary to meet their customers’ needs.
They also can monitor unexpected supply chain disruptions to organize
alternative routing. Suppliers can download forecasts into their own manu-
facturing 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
• 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 requirements

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SUPPLY CHAIN INFORMATION SYSTEMS 5

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 software
(APS). There also have been systems marketed as warehouse management
systems, transportation management systems, manufacturing execution
systems, and the more general logistics management systems, targeted for
specific industries such as the military and/or construction. The 21st cen-
tury has seen a continued expansion of ERP systems to include additional
functionality, such as customer relationship management (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 (MRP)

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 information system
took shape on the factory floor. Manufacturing software developed dur-
ing the 1960s and 1970s, evolving from simple inventory tracking systems
to materials requirements planning (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 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,

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6 SUPPLY CHAIN INFORMATION TECHNOLOGY

calculates the raw materials needed to meet production, and projects raw
materials purchase orders to suppliers. For a company with many products,
raw materials, and shared production resources, this kind of projection was
impossible without a computer to keep track of various inputs.
Electronic data interchange (EDI), the direct computer-to-computer
exchange of standard business documents, allowed companies to handle the
purchasing process electronically, avoiding the cost and delays resulting from
paper purchase order and invoice systems. SCM began with the sharing of
long-range production schedules between manufacturers and their suppliers.
The MRP system should provide four basic items of information: when
to place the 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 fabricate
component quantities on time both for internal purposes and for 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 evolution of MRP was to tackle
the problem of “dependent demand,” that is, determining how many of a
particular component is required knowing the number of finished products.
The next stage of MRP-II evolution was just-in-time (JIT) method-
ology in the late 1980s. MRP-II (manufacturing resource planning) is a
method to plan all resources for a manufacturer. A variety of business func-
tions are tied into MRP-II systems, including order processing as in MRP,
business planning, sales and operations planning, production planning,
master production scheduling, capacity requirements planning, and capac-
ity 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 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
natural extension of MRP-II. The APICS Association for Operations
Management definition for ERP is a method for 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,

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SUPPLY CHAIN INFORMATION SYSTEMS 7

including chemical facilities and even universities. MRP-II functions are

covered by production planning and other ERP modules.

Advanced Planning Systems (APSs)

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
optimization of coordinated activities across the supply chain. Advanced
planning systems (APSs) provide decision support by using operational
data to analyze material flows throughout the supply chain. This sup-
ports the business functions of purchasing, production, and distribution
and through the entire spectrum of planning. Purchasing is supported
by planning and MRP. Production is supported by strategic, master, and
production planning as well as short-term scheduling. Distribution is
supported by distribution planning and transportation planning. These
planning systems interact, enabling management of demand across the
supply chain. APS products are shown in Table 1.1.

Table 1.1. APS Software Suppliers3

i2 Consulting and managed services
Manugistics Resource planning and supply chain management
Wassermann Smart manufacturing, distribution and after-sales services, procurement
management, and information technology
Visopt Supply chain optimization for process industries
Logic-tools Supply chain optimization tools to complement existing software
Fygir Optimized scheduling and planning
Quintig Suite of supply chain planning tools
Seeburger Business integration platform
Infor ERP with APS module option
proAlpha Multiresource, real-time supply chain optimization
Axxom Mobile supply chain optimization and planning
Epicor Acquired Vista and Vantage—ERP with APS module option
Oracle 11i advanced planning and scheduling system
SAP SAP APO

Source: Extracted from company websites.

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8 SUPPLY CHAIN INFORMATION TECHNOLOGY

Advanced planning systems use historical demand data as the 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. Rock-
efeller 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 conditions of
constant product innovation, highly volatile global demand, and increased
product customization (such as applied by Dell and other computer ven-
dors 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)

Warehouse management systems provide the functionality of tracking

parts throughout a supply chain. Systems such as HighJump Software and
RedPrairie Corp offer products using electronic input such as bar code
scanning to track materiel through the supply chain system, maintain-
ing accurate information flow to parallel physical flow. Radio-frequency
identification (RFID) technology provides another form of electronic
data input to WMSs.

Manufacturing Execution Systems (MESs)

Manufacturing execution systems appeared in the mid-1990s, evolving as

all other supply chain information technology. The original focus was to
manage demand on manufacturing organizations with respect to quality,
standards, cost reduction, schedule, and ability to react to change. With
time, functions have emphasized support traceability. MES functionality
now integrates support to most manufacturing execution processes from
release of production 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 integrate support to multiple locations or organizations
within a supply chain. An MES offers the following functionality:

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SUPPLY CHAIN INFORMATION SYSTEMS 9

• Scheduling
• Process management
• Document control
• Data collection/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
will translate that to execution in the form of dispatching, detailed pro-
duction scheduling, and tracking materiel.

Transportation Management Systems (TMSs)

Transportation management systems provide software support at an

affordable level to control shipping. A variety of alternative sources are
available to increase visibility and generate more efficient solutions to
move materiel in an increasingly complex environment involving many
risks (piracy, war, regulations). Functionality provided includes transpor-
tation mode planning, optimization models, and workflow management.4
TMS software can be obtained from vendors, some of whom are
listed here:5

• Accuship
• GEOCOMtms
• HighJump (acquired Pinnacle)
• Infor
• i2 Technologies

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10 SUPPLY CHAIN INFORMATION TECHNOLOGY

• JDA (acquired Manugistics)

• Pitney Bowes
• Oracle (acquired G-Log)
• QAD (acquired Precision Software)
• RedPrairie
• SAP
• Sterling Commerce (acquired Nistevo)
• UPS Logistics Technologies

This list includes the two flagship ERP vendors: Oracle and SAP. It
also demonstrates the volatility of the industry, showing a number of
acquisitions. Other means of TMS acquisition include in-house develop-
ment, 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.

ERP

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

computer systems. Today it is reported that 80% of Fortune 500 firms
use ERP systems to manage operations.6 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 analysis 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 manual 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

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SUPPLY CHAIN INFORMATION SYSTEMS 11

be entrusted to automatically and rapidly take care of everything related

to these functions.
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. Additionally, there 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.
An enterprise information system (EIS) is appearing as a term for the
addition of what used to be independent add-on software such as supply
chain management (SCM) systems and customer relationship man-
agement (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.7 SAP has intro-
duced mySAP.com, which is an open collaborative system integrating
SAP and non-SAP software. SAP APO supports supply chain activities
such as forecasting, scheduling, and other logistics-related activities. Peo-
pleSoft has Enterprise Performance Management to support decisions at
many levels. JD Edwards products have support for planning and execu-
tion. Oracle’s 11i advanced planning and scheduling system was designed

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12 SUPPLY CHAIN INFORMATION TECHNOLOGY

to automate customer, supplier, and firm interactions. Vendors are mov-

ing toward greater integration of supply chain products.
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 inte-
grate legacy systems within a coordinated integrated system. Typically, 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 char-
acteristics 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 func-
tions as possible, with a single database
• Modular—An open system architecture allowing incorporation
of those modules needed for the organization
• Flexible—Capable of response to changing enterprise needs, to
include Open DataBase Connectivity (ODBC)
• 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 rarely can 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 to conform to the new

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SUPPLY CHAIN INFORMATION SYSTEMS 13

system. 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 accu-
rate data. As errors are encountered, users demand corrections, but this is
limited because a set of procedures is needed to ensure that changes do not
introduce new errors. This makes it harder to make corrections, 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 down-
side 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 underbudgeted 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 1.2
recaps these pros and cons of ERP systems.

Table 1.2. ERP Pros and Cons8

Factor Pro Con
System integration Improved understand- Less flexibility
ing 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 Underbudgeted training expense
Hidden costs of implementation

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14 SUPPLY CHAIN INFORMATION TECHNOLOGY

The key rationales for implementing ERP systems are the following:

• Technology—More powerful, integrated computer systems with

greater flexibility and lower IT cost
• Business practices—Implementation of better ways of accomplishing
tasks yielding better operational quality and greater productivity
• 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 customers 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 1.3).

Table 1.3. Reasons for Implementing ERP9

Reason United States Sweden Korea
Replace legacy systems 4.06 4.11 3.42
Simplify and standardize 3.85 3.67 3.88
systems
Improve interactions with 3.55 3.16 3.45
suppliers and 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 2.99 2.48 2.94
competitors
Ease of upgrading systems 2.91 2.96 3.55
Restructure organization 2.58 2.70 3.33

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

Source: Extracted from Mabert et al. (2000), Olhager and Selldin (2003), Katerattanakul et al.
(2006).

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SUPPLY CHAIN INFORMATION SYSTEMS 15

Initially, 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
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
interactions 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 continues
to be needed in this direction (and seems to be proceeding). Link-
ing to global activities was slightly positive in the U.S. survey, more
negative in the Swedish study, and relatively 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. Ease of upgrading systems is a technical reason that received neu-
tral 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 orga-
nizations with coordinated systems that have higher-quality data. Once
the kinks are worked out, this information may be available in a more
responsive 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. Organizations however, soon realized that although
internal efficiency is important, its benefit would be limited unless
complemented by increased efficiency across the supply chain. They

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16 SUPPLY CHAIN INFORMATION TECHNOLOGY

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, organizations started
integrating ERP applications with SCM software. This ensures that
efficiency was achieved across the supply chain, including a seam-
less 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 great help in supply chain decisions.
For example, ordering raw materials can be based on the inven-
tory details provided by the ERP systems.

Web-based technologies have revolutionized the way business is

conducted, and supply chain management and ERP are no excep-
tions. 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 con-
nections to host of external parties. The benefits of such a system are
that customers have direct access to the supplier’s ERP system and that
the vendors in turn can provide real-time information about inven-
tory, pricing, order, and shipping status. The Internet thus provides
an interface between the 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 informa-
tion and immediately gets to know whether the configured product is

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SUPPLY CHAIN INFORMATION SYSTEMS 17

in stock or not. This is made possible because the customer’s request

directly accesses the ERP system of the supplier.

Online Marketplaces

Online marketplaces (OLMs) are exchange mechanisms that can benefit

suppliers and purchasers by providing a more competitive environment
with broader access. E-marketplaces aggregate buyers, sellers, content,
and business services. They also provide a single point of integration for
interaction of buyers and sellers. A buyer can log on to an e-marketplace,
issue a request for proposal, and be flooded with bids. This creates a prob-
lem of bid comparison and interpretation. OLMs also provide services to
help sift through large numbers of bids. Different types of OLMs are
given in Table 1.4, demonstrating different transaction methods.
Auction-based OLMs are commonly used. One use of auction-
based OLMs is as an exchange, seeking simultaneous bids and offers to
determine efficient prices. Future contract variants allow buyers to lock
in supplies or hedge prices. Pure auctions seek only bids to establish
prices for unique products. Reverse auctions do the same, only from the
perspective of offers rather than bids. Metacatalogs focus on reducing
search costs rather than on pricing. Mall-based OLMs allow buyers to
surf a single site, with visits to individual areas representing different
suppliers.

Table 1.4. Types of Online Marketplace Methods

Transaction method
Auction-based Exchange seeking simultaneous bids
Future contract variants For risk reduction
Pure auction systems To establish prices for buyers
Reverse auctions To establish prices for sellers
Metacatalogs Reduce search costs
Mall-based Access multiple suppliers at single site

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18 SUPPLY CHAIN INFORMATION TECHNOLOGY

Example Application of a Supply

Chain Management System
Investment in information technology has become the single largest
capital expense for U.S. firms, accounting for up to 50% of all capital
investment. Zong Dai presented a case study of the implementation of
an ERP system at the corporate level with the intent of demonstrating
the relationship of business processes with ERP, and how ERP systems
can provide sustainable competitive advantage in supply chain opera-
tions. Wyeth, a global pharmaceutical research and manufacturing
company, was studied through site visits, interviews, and examination
of documents such as annual reports, archived records, and electronic
databases. Wyeth develops and markets pharmaceuticals, vaccines, and
biotechnology products for both human and animal health care.
In 1994 Wyeth divested a number of assets that were not related
to their chosen strategic focus on human and animal health care. At
that time Wyeth’s processes were accomplished through a paper-driven
process. They acquired companies that contributed to this selected
strategy. As part of their new strategy, Wyeth wanted to develop
effective information technology. Their business initiatives were to
transform business processes and systems into a globally integrated
supply chain, restructuring product lines to reduce indirect goods and
services and improve system interoperability. An SAP ERP system
was selected with the intent of implementation by 2000 as a means
to upgrade Wyeth’s MRP system to implement data warehousing. A
component of the system was SAP’s Advanced Planner and Optimizer
(APO), software applications to support supply chain management
activities through improving production planning, pricing, schedul-
ing, and product shipping.
The system implementation was accomplished by an internal team
of three Wyeth IT professionals working with three SAP consultants.
The greatest challenges proved to be business process reengineering.
The entire process from sourcing to receipt of payment from customers
was to be electronically automated and stored in one central database.
The purchasing process was streamlined through business process
reengineering (BPR) to enable the most cost-effective procurement.

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SUPPLY CHAIN INFORMATION SYSTEMS 19

The system also kept information on orders, receipts, and inventory

balances current and available in real time. When the planning module
generates production needs, vendor selections are automatically made
considering lead times to ensure uninterrupted production. Pricing,
availability checks, product comparisons, and vendor selection are
instantly available. Orders are immediately printed and distributed by
the system, with electronic verification of invoices to ensure automatic
payment to vendors when goods are received.
The greatest challenge encountered was process and change
management. Training Wyeth personnel was challenging but was suc-
cessfully accomplished through multiple methods. These methods
included instructor lectures, web tutorials, and other training media.
Wyeth was able to utilize their SAP system to consolidate busi-
ness processes across its supply chain. The system was credited with
improving Wyeth financial performance.

Source: Adapted from Zong Dai (2008).

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.
A number of software systems are available to support supply chains.
This chapter reviewed MRP, APS, and ERP. OLM software was briefly
described as an example of other software support. ERP systems were
initially focused on integrating internal operations. Their high invest-
ment 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 elements in
a supply chain adopting the same ERP vendor products, as well as soft-
ware enhancements. However, this is not economically viable for most
supply chain components. Many suppliers may not have the millions

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20 SUPPLY CHAIN INFORMATION TECHNOLOGY

necessary to invest in technology adopted by the core company in the

supply chain.
Other approaches are toward open ERP software. Advanced Plan-
ning Systems 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 opera-
tions. 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 performance
of enterprise applications designed to streamline ERP processes and opera-
tions is dependent on the fundamental network infrastructure. Companies
should take a holistic view of their mission critical applications and net-
working environments and include best-in-class networking 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, “bring-
ing teeth” to those superior intentions. It is not a trouble-free process,
however. In reality, the highly publicized failures of these initiatives have
in some minds brought concern about these applications and their pos-
sible benefits. However, more and more organizations are moving 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 modules, which makes great sense
because not every organization needs every module 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 particular

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SUPPLY CHAIN INFORMATION SYSTEMS 21

modules, organizations can cut initial implementation costs significantly.

While vendors might argue that in the long run this might be more inef-
fective 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 also is 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.
Conversely, support to less structured environments, such as sales and
marketing, tend to be more problematic.

Outline of the Book

This chapter introduced various information systems available to sup-
port supply chain operations. The second chapter will more completely
describe the key supply chain process of MRP and describe its relation-
ship to ERP systems. Chapter 3 will expand discussion of ERP options,
to include APS as an available module or as a stand-alone system. Chap-
ter 4 will discuss the relationship of business process reengineering with
these integrated systems. Chapter 5 will present a systematic selection
technique. Chapter 6 will discuss issues in implementing such systems,
along with demonstration of project management in the supply chain
software context. Chapter 7 will conclude the book, discussing three
issues in implementing these systems.

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