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What is the return on ERP implementation? Results from our research

As organizations seek to drive supply chain integration across global business units and markets, billions of dollars have been invested in massive systems known as
enterprise resource planning (ERP) systems. ERP systems are generally thought of as large systems with transaction processing and data structure capabilities that promote intra-organizational communication.   ERP systems are deemed to be a critical enabler for real-time information sharing to align business decisions and to increase visibility to transactions across internal functions is the largest technological investment for Fortune 500 companies.  Such systems are also instrumental in establishing aligned tactical and strategic performance metrics systems that drive improved economic outcomes (Bendoly et al., 2007). Companies such as Honeywell, Caterpillar, Procter and Gamble, GlaxoSmithKline, and others have made decisions to implement ERP systems across their end-to-end supply chains, from customer order  management to supplier collaboration. ERP systems are designed to integrate transactions from finance, human resources, procurement, operations, sales and marketing, logistics, and other functions in a firm. ERP systems serve as massive databases to standardize business processes and to support decisions concurrent with planning and managing of businesses.  ERP systems were developed from material requirements planning (MRP) and manufacturing resource planning II (MRP-II) systems to supplement the need of an automatic interface between operational activities and corresponding accounting transactions.  They have been touted as the key to manufacturing excellence and supply chain integration…

But what is the real ROI on ERP system implementation?  And how do these benefits accrue?  A research study published recently in the International Journal of Operations and Production Management by my PhD student, Yun-Yung Huang and myself, suggest that the data point to some interesting results.

First the research shows that organizations who had implemented an ERP system had a higher overall level of supply chain maturity and performance.  This however may be due to the supplier segmentation process that occurs when organizations have access to better spend data.  Segmentation, generally associated with strategic sourcing practices, is the basis for building sourcing strategies, which require an ability to negotiate prices based on leveraged volumes of purchases from across the organization.  This in turn drives transformational value in the form of category teams that include multiple stakeholders across the enterprise, leading to improved supplier relationships and other forms of intangible value (e.g. innovation, total cost of ownership improvements, etc.). All of these capabilities take time to build and create, and for that reason, deployment of ERP systems become a catalyst for change within the organization, but is not the sole source of value formation that occurs. Our model would therefore predict that organizations who do not follow-up ERP deployments with other strategic efforts are not only missing out on the potential benefits!

Our research also found that organizations selecting a large provider (SAP) had improved outcomes relative to users of Oracle, other ERP systems, and no ERP system.  However, the results also pointed to some other interesting relationships. An important finding was a negative significant relationship between non-ERP users and category management, supporting our earlier contention that one of the foundational elements in building effective insights into supplier management is the ability to measure what you are spending your money on! With no system in place, users are likely to use multiple forms of transaction channels, including purchase cards, online vendor web sites, purchase orders, or in many cases, contracting after the fact! This form of activity ( known as maverick buying) is one of the most challenging behaviors to control in the enterprise, and leads to deterioration of supplier leverage, and a focus on transactional activities to the exclusion of strategic value-added
procurement activities.  This form of activity ( known as maverick buying) is one of the most challenging behaviors to control in the enterprise, and leads to deterioration of supplier leverage, and a focus on transactional activities to the exclusion of strategic value-added procurement activities.  In a sense, implementing an ERP system “forces” people to “use the system”, rather than navigating the back channels.  By forcing people to go through authorized buying channels, it makes it more difficult (but not impossible) for people to dodge the approved contracts and suppliers.  This discourages most people, apparently, and drives better data accuracy, which in turn, leads to better analytics, and better control of organizational spend.

A secondary effect was a positive significant relationship for Oracle users, but only for the supplier relationship management. This result provides some level of assurance that higher-order supply management benefits are being derived by Oracle users, but neglects to provide evidence of foundational supply management improvements. A confounding factor here may be that Oracle users tend to be congregated in services industries, where achieving a higher level of spend management and strategic sourcing may be more difficult, due to the more fragmented nature of spending on service contracts.

Please go to the IJOPM website to download the article if you’d like more details!