TAXONOMY OF ERP INTEGRATIONS AND PERFORMANCE OUTCOMES: AN EXPLORATORY STUDY OF MANUFACTURING FIRMS James Jungbae Roh Department of Management and Entrepreneurship William G. Rohrer College of Business Rowan University, NJ, USA e-mail:
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Paul Hong* Information Operations and Technology Management College of Business and Innovation University of Toledo, USA e-mail:
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*
Corresponding Author
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TAXONOMY OF ERP INTEGRATIONS AND PERFORMANCE OUTCOMES: AN EXPLORATORY STUDY OF MANUFACTURING FIRMS ABSTRACT Building and deploying network capabilities of firms are crucial for sustaining competitive advantage. Enterprise resource planning (ERP) systems are useful to enhance such network capabilities thorough effective information flows. Their intended goals are measured in terms of production costs, operational flexibility and supply chain performance outcomes. However, the impact of ERP system implementation on firm performance has been reported as somewhat inconclusive. This study contends that a missing link in the story is the scope and extent of ERP system implementation after investigating how the extent of ERP integration is associated with the performance outcomes of manufacturing firms. The study also posits that restructuring in the organization and supply chains are positively associated with manufacturing performance. Since ERP often entails restructuring in an organization and supply chains, it is anticipated that restructuring plays an important role in inducing positive impact of ERP implementation to the firm. Using a global sample of 641 manufacturers, this research identifies four distinct ERP systems integration patterns, epitomized by different extents and directions of integration, and finds a significant association among the broadest degree of ERP systems integration, restructuring and plant performance improvement. The empirical results also show that restructuring takes place most actively in a firm that implement ERP with widest scope and scale. Keywords: ERP integration, cluster analysis, Multivariate Analysis, exploratory study, performance outcomes, manufacturing firms.
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1. Introduction Building and deploying network capabilities of firms are crucial for sustaining competitive advantage (Shi and Gregory 1998; Choi and Kim 2008; Bernardes, 2010; Park and Hong 2012). Enterprise resource planning (ERP) systems are useful to enhance such network capabilities through effective information flows and business process restructuring. Their intended goals are measured in terms of production costs, operational flexibility and supply chain performance outcomes (Karimi et al. 2007; Scott and Vessey 2002; Jacobs and Weston 2007). The key benefit of ERP systems is to provide a platform that shares and integrates information across departments and supply chains (Park and Kusiak 2005; Tarn et al. 2002; Bose et al. 2008; AlMashari et al. 2003; Davenport 1998; Su and Yang 2010). A firm frequently carries multiple sets of unconnected data in various departments, plants, or offices, and this leads to vast direct and indirect costs in reformatting data for compatibility and decision-making. The seamless integration of information through ERP systems enables a firm to consolidate complex and unstandardized interfaces between disparate modules into cross-functional automation. Such a platform allows firms to flexibly collaborate among supply chain entities on a real-time basis, quickly absorb demand variability, effectively foster the decision-making process, and efficiently improve throughput, time to market, and delivery speeds. In addition, ERP systems implementation is beneficial for cost-cutting in unit labor, inventory, customer services, operations, and panoptic controls. Such promises have spurred firms to adopt the technology and consequently ERP systems market has experienced drastic growth over the past two decades. The sales of the largest vendor, SAP, have increased 3,300%, from less than $500 million in 1992 to $17 billion in 2008 (Wailgum, 2009), and the ERP market itself anticipates to exceed $50 billion sales by 2012. For instance, a global mobile phone manufacturer, LG, have implemented ERP systems suite which synchronizes 440 critical business processes in 39 countries and gained concurrent visibility in global supply chains, saving 20% of IT budget and shortening the new product life cycle. Frustration and failures with ERP implementation are also reported. Only 10% of firms have succeeded in ERP systems implementation in China (Zhang et al. 2003). ERP systems installation typically costs a firm $17 million for SAP and $12.6 million for Oracle modules, and even so there is a 93% chance of time-consuming installation and a 50% chance of confusion in using the system (Wailgum 2009). The need for ongoing customization, the resistance to the use of ERP system among managers and employees, the reorientation of business processes, the cultural barriers, and the substantial costs are the main barriers to reaping the benefits from the implementation of ERP systems (Weil 2008; Tsai et al. 2005; Xue et al. 2005; Al-Mashari et al. 2003). Despite the difficulties, firms perceive ERP systems as indispensable software (Weil 2008) and even as the backbone of the organization (Su and Yang 2010). The question is how much ERP systems integration is desired and how useful it is in improving the bottom line of the company. Prior research has delved into this question using event studies, case studies, or surveys. Most research has compared performance of pre- and post-ERP systems adoption. This approach can be at flaw, because such comparisons do not consider the extent of ERP systems integration in a firm or a supply chain. In addition, prior studies have paid limited attention to the duality of ERP implementation, which is redesigning and restructuring business processes across supply chains. As the scale and scope of ERP implementation grow and permeate deeper into the supply chains, manufacturing firms are required to redesign their ineffective processes and orient
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the supply chains to respond to volatile environment (Vemuri and Palvia, 2006; Karimi et al. 2007; Wieder et al. 2006; Goeke et al. 2009). This study aims to fill this research gap by classifying ERP systems integration patterns and examining their performance divergence in view of business process and supply chain restructuring. Four distinct ERP systems integration configurations are found, and the evidence consistently shows the significant association between the broadest degree of ERP systems integration and plant performance improvement. What matters is how successfully firms have adopted ERP systems and how effectively the adoption has brought about redesign and restructuring in the organization and the supply chain. This study makes a contribution to deepening the understanding of the extent of ERP systems adoption and its relationship with firm performance. 2. Theoretical Background and Literature Review 2.1. Theoretical Background Gidden’s structuration theory (1979, 1986, 1987) advocates "duality of structure" as a mechanism of interaction between micro- and macro-entities. Simply put, the theory pertains to the formative interaction between people and the structure, and it implies that social structure and individuals mutually enable and constrain each other due to the structure being the very medium of social constitution (Giddens 1993). Drawing on Gidden’s theory, Orlikowski (1992) and DeSanctis and Poole (1994) propose adaptive structuration theory (AST) which reconceptualizes the dynamic relationship between technology and the users. AST comprises two premises: duality of technology and modality of interpretive scheme. The duality of technology refers to the formative interplays between technology and human agent: Technology imposes institutional properties on human agents and thus it both constrains and enables their activities while technology is not fixed but changes over time in the course of the interaction with human agents. In this sense, technology and human agents harbor reciprocal and interdependent influences on each other. The second premise, the interpretive flexibility of technology, views technology as artifacts, potentially modifiable throughout their existence via active human agent’s interaction in design and use mode. This is the corollary of the duality of technology and implicates the significance of user’s ability to use and interpret technology that opens rooms for flexible interpretation. Taken together, duality of technology and modality of interpretive scheme resonate the restructuring that a technology adoption brings about to an organization. AST implies that all technology is implemented in milieu of pre-existing organizational structure, norms, and processes. The interaction between technology and implementers and users shape the structure of the organization to a varying degree. ERP system exhibits high degree of technology duality due to its multifaceted nature and overarching scale. Encompassing the most business processes, ERP system demands its users to unlearn previous practices and adopt the embedded best industry practices. The synchronized data sharing across the supply chains eliminates redundant steps, administrative intermediaries and bottlenecks. Integrated data sharing makes it possible for firms to straighten management complexity and often flattens the organizational structure via process integration and standardization at intra- and inter-firm level (Karimi et al. 2007; Grover et al. 1997; Gattiker and Goodhue 2005; Hendricks et al. 2007). In line of this view, Bendoly and Cotteleer (2008) state that “Regardless of the form and function of the ERP, it is clear that the imposition of the system’s codified protocols on work processes is likely to have some impact on the form and
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function of the organization, and on the behavior of those in the organization charged with its use” (p. 25). For example, a study reports that ERP implementation standardized business process, innovated business processes, and made performance improvements (Robey et al. 2002). Another study shows that the technology implementation has disintermediated the levels of management levels (Harley et al. 2006). Although the technology implementation and restructuring poses challenges, they present the opportunity to restructure, reorient and reinvent the business processes in a firm and a supply chain. As the reach and breadth of the technology implementation enlarges, restructuring intensifies and such restructuring, when successfully done, will bring a plant performance to a higher level than before. Drawing from the AST, figure 1 portrays the research framework. The levels of ERP integration affect the scale and scope of restructuring, and they affect a plant performance. We use the analogy of three toothed wheels in operation because the outcome of ERP system integration reflects restructuring in production process, supply chain, and distribution. The radius of ERP systems integration matters because the larger it is, the broader restructuring takes place. Such integration and restructuring efforts work together to improve manufacturing and firm performance. ********************** Take in Figure 1 about here ********************** 2.2. ERP Implementation and Firm Performance Building on the literature, this study shows that the scope and scale of ERP systems are critical to improving firm performance. Mature technology investment with the fullest integration of an ERP system is strategic technology positioning that provides a firms’ competitive advantage. Each ERP system module enhances multiple process chains that reflect sequential functional operations. These chains are tightly interconnected with other functions. ERP systems can be divided up for sequential or incremental implementation by functions, departments, locations, or regions (Karimi et al. 2007). When a firm fully implements ERP systems in their business environment, it will be more likely to accommodate exogenous and endogenous changes, escalate complementary roles from multiple ERP models, and strengthen its firm performance (Anussornnitisarn and Nof 2003). Some firms have reaped significant operational and strategic rewards from ERP systems, while others have failed to realize the expected performance (Karimi et al. 2007; Koh and Saad 2003; Scott and Vessey 2002). Several studies have shown a positive relationship between ERP systems adoption and firm performance (Hitt et al. 2002; Goeke et al. 2009; Madapusi and D'Souza 2012), whereas some have presented negative or mixed results (see Table 1). Hendricks et al. (2007) find negative stock returns in response to ERP announcements in a study of 186 U.S. firms. Mabert et al. (2003) contend that few firms have reduced their direct operational costs despite certain improvements in managers’ perceptions of performance in a study of 78 U.S. firms. Quite a few studies find that firms suffer financial difficulty until after the first and second years of the implementation but then starts reaping the benefits of the adoption (Poston and Grabski 2001; Hitt et al. 2002; Matolcsy et al. 2005; Nicolaou et al. 2003). Some researchers point the mixed results to the ineffective usage of information technology (Stratopoulos and Dehning 2000). Some have explained the role of organizational, technical, user, task, or environmental factors that may affect ERP systems adoption, implementation, or outcomes (AlTurki 2011; Karimi et al. 2007; Oztemel and Polat 2007).
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********************** Take in Table 1 about here ********************** A review of the literature indicates that little attention has been paid to the extent of ERP integration and the association between the diverse patterns of ERP implementation and firm performance. This study posits that the extent of ERP systems integration is a missing link in the story for what matters is how much integration ERP systems bring to the firms. A way of investigating the issue is to examine the scale and scope of the ERP integration that a firm takes. For this reason, the present research sets out to explore the configuration of ERP implementation and its association with firm performance. 3. Hypothesis Development 3.1. The Patterns of ERP Integration The scale and scope of ERP module implementation differs by firms due to a few reasons. First, firms may have different needs. A variety of ERP modules exist for implementation options. Depending on the need and strategy, a firm may choose different combination of modules to implement ERP systems. Second, the extent of a module usage is different. Even if adopting the same number of modules, firms may face resistance, technical difficulties or difficulties to customize the modules. An auto-manufacturer may emphasize accurate and timely production in the process that requires seamless cooperation from its suppliers. Since their principal operation encompasses a broad spectrum of business activities from material management to customer relationships, they might consider adopting as diverse modules as possible. Strategic importance, competition intensity, or financial leverage also constrains ERP systems integration decisions. As a result, firms will exhibit different patterns of ERP systems integration. Thus, we hypothesize, Hypothesis 1. There exists different patterns of ERP system integrations among manufacturing firms depending on the scale and scope of ERP modules. 3.2. ERP integration and firm performance Despite inconclusive results surrounding the relationship between ERP systems integration and firm performance, there are several reasons why integration may be positively associated with performance. First, ERP system facilitates knowledge sharing and coordination among individuals, groups, and organizations in the supply chain. According to a knowledge-based view of the firm, organizations apply principles and transform expertise in the community into valuable products and services (Kogut and Zander 1992). Such a transformation can effectively take place in an environment where an array of cross-functional expertise is effectively exchanged and integrated to create novel expertise. ERP system is conducive to providing such a platform. It combines data in silos into an integrated data warehouse and makes it available throughout the supply chains. Such integration enables a firm to understand demand oscillation in the front-end and reflect the changes in the upstream on a real-time basis and increase collaboration along the supply chain and as a result to synchronize customer wants with manufacturing, suppliers, distributors, and beyond (Lee and Whang 2004; Rosenzweig et al. 2003; Narasimhan and Kim 2002; Frohlich and Westbrook 2001) .
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Second, ERP system restructures business processes to enhance organizational integration. ERP system implementation goes beyond the technological level. This is because any ERP system embeds certain assumptions about doing business into the system, and these may or may not be the best assumptions for the adopters. Thus, an adopter has to either reengineer its business processes to fit into ERP system processes or adapt the ERP system to its business processes. As an executive of a company said, “SAP isn’t a software package; it’s a way of doing business” (Davenport 1998). Time-consuming customization takes a firm a great deal of time and incurs considerable cost, and this process is often identified as being responsible for implementation failure. Upon successful integration, however, the restructuring allows firms to revamp inefficient practices and improve efficiency throughout the supply chain (Davenport 1998; Granlund and Malmi 2002; Hong and Kim 2002; Zhu et al. 2010). Third, ERP system enables a firm to achieve a swift and even flow of materials and products from suppliers to customers. Manufacturers often face problems with part shortages, inventory, quality, delivery, and cost increases, which are often the results of inept internal and external supply chain integration. According to the theory of swift, even flow, manufacturers can achieve financial gain through a swift and even flow of materials and products in the manufacturing and supply chaining process (Schmenner and Swink 1998). A swift and even flow helps a manufacturer to eliminate non-value-added activities such as overproduction, waiting, transportation, unnecessary processing steps, stocks, motion, and defects. Bottlenecks and wide variability in operations are other factors that hinder a swift and even flow. By enhancing supply chain visibility, collaboration, and efficiency of processes, ERP enables a firm to integrate fragmented, unstandardized, and uneven operations and thus decrease the net costs of business (Su and Yang 2010; Park and Kusiak 2005; Akkermans et al. 2003; Palaniswamy and Frank 2000; Frohlich and Dixon 2001). Thus, we hypothesize, Hypothesis 2. Companies with the greatest ERP system integration will have the largest rates of performance improvement. 3.3. ERP Integration and Restructuring Information technology has emerged as an engine of organizational restructuring, and numerous researchers have paid attention to its effect on organizational change and transformation. Its rationales for structural change are three-fold: technological imperative, organizational imperative, and emergent interactions (Pfeffer 1982; Markus and Robey 1988). First, a technological imperative standpoint sees ERP as an external force that causes restructuring in business processes and organizational structures. In this view, technology features solely determine the levels of organizational changes and circumscribe social actors’ control over the impact of the technology to a limited degree. In the context of ERP systems, the integrated and interdependent platform force functional units, people, and suppliers to streamline their business processes and achieve desired performance amid the hypercompetitive environment (Karimi et al. 2007; Park and Kusiak 2005; Ranganathan and Brown 2006). The scope and scale of the systems are configured at the organization-level and its packaged nature imposes forceful integration via standardization and modularization on the subunits of the organization (Gattiker and Goodhue 2002; Gattiker and Goodhue 2005). Second, the organizational imperative views the technology as an artifact that organizations deliberately opt in and out its features to materialize intended changes. This view assumes that system designers and managers can exercise unrestrained control over technological configurations and thus the consequences of the technology implementation. Whereas the
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technological imperative contributes the change agent to the traits of the technology itself, the organizational imperative finds the cause of the restructuring from the motives and actions of organizational decision to adopt the technology. Although ERP vendors study numerous industry practices and embed the best practices into their modules, it is the implementers and managers who make decisions to adopt a set of modules and then either accept or customize the predefined business processes (Bendoly and Cotteleer 2008; Jacobs and Weston 2007; Hussain and Hafeez 2008; Bendoly et al. 2009). Third, emergent interaction perspective stresses the unpredictable and sophisticated interchange between technological characteristics, implementer’s intentions, and organizational context. The same technology can yield to different impact on organization due to emergent nature among the social actors, technology features and organizational text. Even if the same technology has been implemented in an organization, different departments and users might perceive and interact with it in different levels and this multifaceted interplay results in complex and sometime unanticipated restructuring. According to Soh et al. (2000), the success rate of ERP implementation in firms in Eastern Asia has been low due to the unexpected discrepancy between the western business assumptions in ERP systems and Asian business culture. The duality of technology and modality of interpretive scheme reciprocally emerges in the process of ERP system implementation, increasing the complexity of the impact of the technology on restructuring in business processes and organizational structure and supply chain relationships (Harley et al. 2006; Huq et al. 2006; Narasimhan and Kim 2002; Rosenzweig et al. 2003; Stock and Tatikonda 2008; Kraemmerand et al. 2003). ERP integration is a dynamic process of mutual adaptation between the organization and technology. Restructuring may take place either in ERP package adaptation to organizational needs or organizational adaptation to the package (Hong and Kim 2002). ERP vendors advocate process adaptation versus ERP adaptation to minimize maintenance and upgrade complexity. The first two imperatives pertains to the duality of technology and the emergent perspective the modality of interpretive scheme. Taken together, we hypothesize, Hypothesis 3. Companies with the greatest ERP system integration will exhibit the largest rate of restructuring in manufacturing process, supply chain, and distribution chain. The past two decades have shown the importance of organizational restructuring for innovative and effective processes for competitive performance outcomes. Whereas IBM transformed from predominantly hardware to service and consulting company, Kodak has diminished in substance, and HP has faced growing challenges in electronic business, Apple, GE, and GM have made successful transitions, thanks to vast restructuring efforts. In particular, Hammer and Champy (2003) find that restructuring has played a key role in unlocking the promise of technologies into palpable outcomes. Despite technologies resources, it is restructuring that brings successful changes to an organization and translates the technological initiative to enhanced performance. In a broad context, restructuring goes beyond improvements in business routines and involves strategic shifts to increase innovative network capabilities to absorb risks and exploit opportunities in global market (Park and Hong 2012; Park et al. 2012). Effective coordination of the flow of goods and information throughout a thoughtfully developed supply chain can enhance a firm’s ability to respond to customer needs for innovative products and increase overall coordination capability of the supply chain (Roh et al. 2011). Studies in business process reengineering and supply chain integration have suggested that restructuring facilitate firms to eliminate wasteful elements and promote overall process effectiveness in the
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supply chain. Suppliers with enhanced competence stemming from SCR better serve customers, achieve cost competitiveness, and tailor supply chain outcomes to the market requirements (Kopzak 1997). Hypothesis 4. Companies with the greatest restructuring will exhibit the largest rate of restructuring in manufacturing process, supply chain, and distribution chain. 3. Research Methods 3.1. Sample Empirical evidence was drawn from the 2005 round of the International Manufacturing Strategy Survey (IMSS IV) to test the hypothesis. A global network of researchers from 23 countries coordinated this research project, and a total of 761 responses were gathered, with the average response rate exceeding 25%. The respondents are typically vice presidents or directors of operations management. To ensure content validity, where English is not the native language of the respondent, the survey was translated into the respondent’s language and back into English. Over the years, a broad range of journal papers are published in the areas of manufacturing strategy, operations management and international comparatives using IMSS data (Acur et al. 2003; Lindberg et al. 1998; Voss and Blackmun, 1998; Frohlich and Dixon, 2001; Cagliano et al. 2003, 2006; Yang et al. 2011; Hong et al. 2010). This IMSS data, with its diverse and rich in international manufacturing contexts, are quite useful for exploratory studies for theory development (Frolich 2000; Frohlich and Westbrook 2001; Cagliano et al. 2005; Silveira and Cagliano, 2006; Roh et al. 2011). For the purpose of this paper, a total of 641 responses were included in this report after deleting incomplete data, and the profile of the sample is summarized in Table 2. ********************** Take in Table 2 about here ********************** 3.2. The instrument To ensure content validity, the validity of the instrument and the appropriateness of scale construction were checked (Nunnally 1978). In this study, nine different categories measured the direction and extent of ERP system integration: material management, production planning control, purchasing and supply management, sales management, distribution management, accounting and finance, human resource management, project management, and product lifecycle management. These different modules cover important domains of the enterprise system laid out by Davenport (1998). All types of ERP system integration were measured on Likert scales with 1 representing no use and 5 for high use. 3.3. Cluster analysis To indentify ERP system integration types, a two-step clustering procedure was used (Ketchen and Shook 1996; Hair et al. 2005). First, a hierarchical method determines the number of clusters and cluster centroids. Ward’s partitioning method with squared Euclidean distance was used for its proven ability to maximize within-cluster homogeneity and between-cluster heterogeneity and to recover known cluster structure (Aldenderfer and Blashfield 1984). The squared Euclidean distance measure is known to minimize the sum of squares error when used with Ward’s method (Arabie and Hubert 1994). Standardization of the variables may need to be considered when the
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scales are different among clustering variables. Also, the use of Ward’s method is undesirable when outliers are present in the data. However, the scales of the data are consistent, and so it was deemed appropriate to use Ward’s method. To determine the number of clusters, the dendogram was checked and then the incremental changes in the agglomeration coefficient were examined. These assessments indicate a sizable leap in the agglomeration coefficient in the four-cluster model. To validate the four-group model, we tested for heterogeneity across clusters based upon the ERP modules. All 9 modules differed significantly in a test of mean rank differences across the four clusters (P
