ERP II: Harnessing ERP
Systems with Knowledge Management Capabilities
Mirghani Mohamed, George Washington University , Adam Fadlalla, Cleveland State University
ABSTRACT:
Conventional Enterprise Resource Panning (ERP) systems are characterized by
their focus on improving manufacturing-based competitive advantage and
intra-enterprise business process integration and efficiency. ERP integrative technology provides
transactional information, but it is the responsibility of organizations to use
its creative insight to transform such information into knowledge. Knowledge
management (KM) capabilities within ERP systems are clearly needed to help
achieve this transformation. The need for such synergy is even greater with the
expansion of ERP systems beyond their prime On-Line Transaction Processing
(OLTP) functionality and beyond the enterprise boundaries. Blending KM
capabilities into ERP systems is one of the major drivers behind ERP II, the
new incarnation of ERP.
Introduction
ERP systems bundle various modules to integrate various business processes in one central repository. Looking at industrial practice during the past decade nothing appears to have had such a great impact on organizational innovation as the growing market of application software packages such as ERP systems (Scherer, 2000)). However, the plethora of information from customers, suppliers, and even competitors has lead to information overload. At the same time, the business environment is witnessing an unprecedented rate of change. Under such circumstances, the ability of companies to survive and thrive depends on their ability to know and innovate. The flow of information between the company and its stakeholders will create a valuable feedback cycle for tapping the knowledge of the entire business value chain, a major proposition of ERP II. Hence, ERP II can be considered as a new way of managing the intellectual capital of the organization and is an evolutionary step in the automation of information management, rather than a revolution that will change the business world.
ERP
II: Historical Perspectives
The evolution of ERP systems is a reflection of added layers of functionality to its germ-cell Materials Requirements Planning (MRP) of the 70’s. Manufacturing Resource Planning (MRP II) emerged in the 80’s and then followed by Enterprise Resource Planning (ERP) systems in the 90’s and ERP II in the 2000’s (see Figure 1). ERP offers one integrated solution that aligns information technology and business processes into one repository. The ERP progression parallels the development of the economy, which was considerably instituted on the tangible assets during the 70’s. But, over time this dependency gradually skewed towards the intangible assets and intellectual capital.
Materials Requirements Planning (MRP):
MRP originated in the 70’s from a simple inventory control system. Initially, MRP was limited to the factory materials and planning, and was described as a set of logically related procedures, decision rules, and records designed to translate a master production schedule into time-phased net requirements (Orlicky, 1975)). However, Ho (1996) observed that MRP appears as a simulation tool, which allows managers to examine the consequences of their production planning decisions. But even the decision process should not be used for long term planning, as long term planning within MRP systems is also particularly difficult and it is reliant on long-term sales forecasts, which are usually not accurate enough for taking decisions (Burbidge, 1983). Furthermore, the decision process is not limited to the managers as witnessed by Humphreys et al (1998) that a large number of purchase order and engineering changes will have a detrimental effect on the accuracy of the supplier's material planning system and thus will reduce the ability to respond rapidly to any changes requested from the buyer.
Barker (2001) reported that during the late 1980s there was a growing final realization that MRP systems were failing to match the required speed of response. This failure is also confirmed by Morgan (1994) who concluded that too much time is spent implementing the mechanics of MRP systems, and not enough on the fundamental premises behind the system. MRP assumes that there is a valid working relationship between buyer and supplier that allows the sharing of information without reservation. Kalakota and Whinston (1997) observed the lack of communication and integration between production units and concluded that MRP systems fell short of supporting multiple plants and multiple suppliers. A more unenthusiastic observation about MRP, in the fields of knowledge capturing and employee empowerment, stated by Barker (2001) who considered the 1970s as an ideal time for the release of untapped human intellectual capacity into the manufacturing organizations. In hindsight, however, it can be seen that the arrival of MRP prevented this union. Indeed, at that time managers were still unsure that total employee involvement in any form had any advantages and decided in the majority of cases that they could manage from a distance via the computer.
Many other investigators agreed on the fact that MRP failed to satisfy the market requirements, but for entirely different reasons. Walley (1999) stated that the real reason for MRP's failure is that it is based on a flawed model, while Brown (1994) attributed the inadequacy of the system to the fact that many re-implementations of MRP systems are the result of a failure to implement business changes along with the software. One of the principal reasons why MRP and other large, technologically sophisticated systems fail is that organizations simply underestimate the extent to which they have to change in order to accommodate their implementation. The effective management of technological change requires transformational leadership.
Manufacturing Requirements Planning
(MRP II):
Due to the above MRP shortcomings in the 1970’s, the Manufacturing Resource Planning system (MPR II) has emerged in the 1980’s. Sadagopan (1998) stated that, unlike MRP, MRP II addresses the entire manufacturing function and not just a single task. The increased functionality enabled MRP II to check the feasibility of a production schedule taking into account the constraints, and to adjust the loading of the resources, if possible, to meet the production schedule. While Siriginidi (2000) added the possibility of the integration with other shops , MRP II has certain extensions like rough cut capacity planning and capacity requirements planning for production scheduling on shop floor as well as feedback from manufacturing shops on progress of fabrication. This last functionality requires a more integrated system.
MRP II is more than a material management tool as indicated by Koch (2001) and within the logistic vision, the technology of MRP II, manufacturing resource planning offers an interpretation of both the main problems of manufacturing as material flow, and the tools and procedures needed to solve these problems by realizing a full control system. However, Swan et al (2000) observed that MRP II has been widely promoted by technology suppliers as the definitive "best practice" solution for production management and control. But, firms have encountered many problems in implementing MRP II - including organizational not just software. However, prior to these findings, Foxlow (1994) reported that there is a need for new knowledge-based manufacturing software, incorporating artificial intelligence techniques, offers benefits to companies whose products are complex, highly varied, or made-to-order. However, these are precisely the areas where conventional MRP II systems are widely perceived as having failed.
Technically, MRP systems were originally run on mainframe with two-tier architecture, which in itself is a limitation to the alignment and integration between business process and technology. Hence, MRP cannot be considered an enterprise wide system. On the other hand, MRP II runs on various operating systems, but was faced with problems such as systems interoperability, protocols incompatibility, and software interfacing issues.
Chung and Snyder (2000) mentioned that both MRP and MRPII had been lacking the combination of both business processes in the organization and total organizational IT into one integrated solution.
Due to these MRP II shortcomings, ERP emerged as a more comprehensive solution as described by Chen (2001) that in the 1990s, MRP II was further expanded into ERP, a term coined by the Gartner Group. ERP is intended to improve resource planning by extending the scope of planning to include the supply chain. Thus, a key difference between MRP II and ERP is that while MRP II has traditionally focused on the planning and scheduling of internal resources, ERP strives to plan and schedule supplier resources as well, based on the dynamic customer demands and schedules. Stank and Goldsby (2000) noted that the transition of planning systems from functionally focused applications such as MRP and Distribution Requirements Planning (DRP) to integrated systems such as ERP may help provide the manager with the needed information to make better decisions. Nonetheless, this requires technical and functional additions to the MRP II, as Siriginidi (2000) stated that ERP is the latest enhancement of MRP II with the added functionalities of finance, distribution and human resources development, integrated to handle global business needs of a networked enterprise.
ERP systems were also faced with their own implementation and integration problems. The major difficulties with integration, however, appeared during the augmentation of core ERP systems with legacy systems. Themistocleous and Irani (2001) stated that ERP systems were then introduced to overcome integration problems. However, organizations did not abandon their existing systems when adopting an ERP solution, as ERP systems focus on general processes and initially did not allow much customization. The problems of integration within the core of ERP systems have resulted in multiple shortcomings as reported by DeSisto (1997) that poor ERP integration resulted in high order error rates, incorrect billing and shipping addresses, misquoted pricing and discounts, and misquoted “out of stock” inventory.
Although the integration process within a single ERP system is considerably improved, the earlier attempts of this integration came with their high price tag, and some of the early ERP implementations have suffered relatively high rate of project failure (Haight and Govekar, 2002, Chen, 2001, Zrimsek et al, 2001, Skok and Döringer, 2001, Majed Al-Mashari, 2000, Boudreau and Robey, 1999, Scott, 1999).
One of the major ERP limitations is the lack of communication and integration between the three major stakeholders - the company where the core ERP resides, the supplier, and the customer. Due to these integration restrictions in the conventional ERP systems, Gartner Group coined a new ERP architecture called ERP II. The main theme of this new architecture is to upgrade an ERP system by transferring it from an inwards solution to an outwards solution. This is accomplished through componentization and integration of the “front-office” tools such as Customer Relationship Management (CRM), Supply Chain Management (SCM), and collaboration and coordination platforms with the “back-office” represented by the core ERP system. This new system architecture satisfies the cross-functional alignment between trading partners and collapses the distance and time factors that directly affect efficiency, profitability, and innovation (a key goal of knowledge management). For example, instead of answering calls from customers about when a shipment will be delivered, a customer can access the supplier’s delivery information online, and, similarly, instead of suppliers relying on a customer to send updated forecasts, they can work from real-time information found online.
In addition, ERP II is designed with Knowledge Management (KM) capabilities in mind. Malhotra (1998) described knowledge management as a process that: caters to the critical issues of organizational adaptation, survival and competence in face of increasingly discontinuous environmental change. Essentially, it embodies organizational processes that seek synergistic combination of data and information processing capacity of information technologies, and the creative and innovative capacity of human beings. Hence, while ERP systems are used to integrate and optimize an organization’s internal manufacturing, financial, distribution and human resource functions, ERP II systems are used to address the integration of business processes that extend across an enterprise and its trading partners. Therefore, ERP II forms the basis of Internet-enabled e-business and collaborative commerce (C-commerce).
Figure 1: ERP
II Evolution Summary
|
Period |
Technology |
Scope |
Major Shortcoming |
|
70’s |
MRP |
Material management task |
Single-task focus |
|
80’s |
MRP II |
Manufacturing function |
Single-function focus |
|
90’s |
ERP |
Intra-enterprise integration of all functions. |
Single-enterprise focus |
|
2000’s |
ERP II |
Inter-enterprise integration |
Complexity |
The
Integrative Nature Of ERP II
Chung and Snyder (2000) examined the task and
technology characteristics of MRP, MRPII and ERP and found that the degree of
potential integration between task and technology affects compatibility in the
manufacturing process. The importance of technology integration has also been stressed by Zhouying (1999) who reported that alongside the increase in
complexity of modern science and technology, integration becomes the main
feature of the high-tech development. ERP systems successfully achieved
intra-enterprise transaction, process, best practice, and application
integration (Figure 2), all leading to internal efficiencies. ERP II strives to
extend such integration capabilities beyond enterprise boundaries to achieve
further efficiencies and innovations and, consequently, competitive advantages.
At the transaction integration
level, ERP II systems extended it to enable transaction integration between
trading partners. For example, one partner could be taking an order, a
transaction that could be propagated as an order transaction to another
partner. At the business process and
functional levels, the scope of ERP offerings expanded in the mid-1990s to
include other "back-office" functions such as order management, financial
management, warehousing, distribution, production, quality control, asset
management and human resources management.
This functionality augmentation is observed by Martin (1998) who concluded that ERP systems can be
considered as an IT infrastructure able to facilitate the flow of information
between all supply chain processes in an organization. The broadening of scope
of ERP systems beyond the single organization territories has been noted by Swan et al
(2000) who called it "boundary spanning"
and described it as the processes by which members of firms participate in
networks that extend beyond the boundaries of their own organization, i.e.
processes of inter-organizational networking. The importance of boundary
spanning for developing and sharing knowledge relevant to innovation has been
highlighted in many examples of technological innovation and business
relationships, as will be discussed shortly.
Beyond
Operational Support and Solo Enterprises
One of the objectives of traditional ERP systems
is to integrate the intra-organizational business processes through
transactional flows between different modules representing different
departments. Originally, ERP systems were monolithic systems designed to
perform domestic business processes, and not suitable for use in solutions such
as e-commerce (Business-to-Customer, B2C) or C-commerce (Business-to-Business,
B2B). For this reason, with ERP systems, supplier channels, customer channels,
and even intra-enterprise applications must be integrated via proprietary
gateways or out-of-the-box enterprise application integration middleware. Chan (1999) stated that pity the companies whose
intention in purchasing ERP software was to tie their internal production
systems together in the first place, only to be locked into proprietary
technology and barred from extending the links to their supply chain or
customers. In the complex universe of supplying information technology to
assist the business processing of corporations, integration is the key to
successful execution, optimizing revenue and managing costs.
Figure 2: The Moving Boundaries of
Integration.
The Need for and Role of KM
Capabilities in
In the new generation of ERP systems, the core ERP system and knowledge management are not separate, rather they are inextricably intertwined. Both systems depend on the integration process. The main objectives of the integration in both systems is sharing of information and knowledge, avoiding duplication of effort, increasing efficiency, effectiveness, and innovation. These goals require high level of interfacing, interoperability, and compatibility. Chan (1999) reported that in reality, merging front- and back-office strategies is not easy, either culturally or architecturally. While CRM for example focuses on increasing revenue, a back-office system focuses on reducing costs. Culturally, there remains a huge discrepancy in these goals. Hence, technology goals must be aligned not only with internal business processes, but also with those of diverse partners, customers, suppliers, and distributors.
To achieve and sustain competitive advantage through ERP, the system needs to grow in a learning organization ecosystem where the transactional culture metamorphoses into organizational integrative relations and the organization units change into communities of practice and/or communities of interest for knowledge sharing. Tenkasi and Boland (1996) stated that information technologies are increasingly playing an integrative role in knowledge intensive firms as a way of achieving mutual learning. However, the information systems field has predominantly been driven by the notion of integration as a rational design process and an end state to be achieved through a static incorporation of knowledge domains a view that failed to consider the interpretive dynamics associated with the integration of differentiated knowledge and expertise. ERP integrative technology is needed to change internal business structures, but this accomplishment needs to be supported by building strong external relationships and alliances through exotic communication and integration with all stakeholders. Kontzer (2003) quoted Peter Drucker, the famed business theorist, saying, “corporate IT hasn't come close to delivering the benefits companies have been looking for. Information technology is beginning to supply the information we need for business decisions. It provides nothing of use about the outside [business] environment. Where IT has been most helpful is in supporting internal operational decisions. Stijn and Wensley (2001) observed that packages such as SAP provide a varied and rich environment for process modeling. However, there are still many instances where process knowledge is either lost or represented in different ways in different parts of the organization. The authors suggested that considerable care should be exercised to identify exactly where different types of process knowledge reside in organizations. During implementation of ERP systems or other complex information systems, decisions will have to be made as to what types of process knowledge can and cannot be represented in the ERP.
A business culture of information sharing and knowledge management plays a key role in enabling these inter-enterprise applications integrations. The premise is that such communication and information sharing will be mutually beneficial to all trading partners. The increased knowledge sharing leads to greater back-office efficiency, greater customer intimacy, improved strategic planning, flexible adaptation to market and economic landscape changes, improved decision making, rapid and flexible supply chain management processes, and other organization benefits (Warkentin et al, 2001). Furthermore, enterprise applications integration can be achieved by adoption of new technologies, such as XML, web services, and intelligent agents as core technologies within ERP systems – a trend reflected in all the major ERP systems.
In addition to integration of structured data (successfully achieved with ERP systems), ERP II is expected to enable integration of unstructured data as well, if it has to deliver on its promise of achieving enterprise application integration; hence the role of knowledge management capabilities. Knowledge can be explicit or implicit. Explicit knowledge is captured in structured and unstructured formats and in various types of documents (e.g., Worksheets, Word documents, Graphs, Text, etc). ERP II systems can build on the successful track record of ERP integration of structured data, to provide capabilities of integrating unstructured data – a key source of organizational knowledge. Similarly, knowledge has to be disseminated in various artifacts as well. Instead of trying to develop all applications required for knowledge management, ERP II will serve knowledge management better by leveraging corporate repositories and infrastructures for integrating knowledge capturing and dissemination tools applications.
One of ERP systems’ claims is that these systems integrate the
“best business practices” in the market. However, due to dynamism
of knowledge and the economy landscape, “best practices” should not
be regarded as static objects. In
addition, the best practices for one organization may be the worst practices
for another, depending on the dynamic market forces imposed on each. Although most ERP systems have business
practice processes in their repositories, not all of these processes are
necessarily best in class applications for a specific organization. The
organization still needs to select those
applications available from software vendors for its specific requirements, and
integrate both the applications and ERP systems into the firm's IT backbones. A
major push of the new generation ERP systems is to integrate KM concepts in the
value network. By extension, “best practices” can only be
considered as KM endeavor, only if the purpose is to derive innovative insight
out of what has been stockpiled in the past for future actions. However, if the
“best practices” are used “as is”
then the attempt doesn’t go beyond the definition of information
retrieval that long existed in the past.
ERP II And The Extended
ERP packages led to better production planning, quality and inventory control, expense management and more efficient distribution. The primary objective of ERP systems is to seamlessly improve the internal efficiency through order fulfillment, thus embedded significant knowledge in their repositories. However, information on just one side of the business equation is ineffective in achieving a competitive advantage in the new global economy. Preiss (1999) reported that it has by now become the accepted norm that competitive advantage in business has moved from advantage in access to capital and in the ensuing process ability, whether the process is marketing, manufacturing or anything else, to advantage in knowledge management and innovation.
The new market demands a distributed knowledge network, which necessitates the participation of the entire value chain from customer to supplier, and in some cases, even from competitors. Warkentin et al (2001) stated that new flows of strategic supply chain knowledge lead to new strategic relationships in the e-commerce marketspace. Firms that strategically maximize the impact of these new knowledge flows will be in a position of competitive advantage in the emerging networked economy. This requires synergetic relationships between CRM, KM, and supply chain within one system. According to Thompson and Close (2001) since the beginning of 1997, the major ERP vendors (e.g., SAP , PeopleSoft and Oracle) have attempted to expand their dominant position in the financial, manufacturing and human capital management enterprise applications markets into the increasingly lucrative customer relationship management (CRM) market. Until recently, these attempts have mostly failed to meet client expectations. However, their labors are beginning to pay off.
Although ERP systems interconnect different departments through the various modules, but to some extent, ERPs initially created functional silos by enforcing the business process workflow through single technology. This silo effect needs to be counterbalanced by implementing KM initiatives that promote the communication and knowledge sharing among various value network collaborators. The KM initiative as supportive mechanism for ERP will reveal different kinds of knowledge to different stakeholders. Pearson (1999) argued that application programs such as ERP and MRP II, can be integrated into a knowledge supply chain based on a new enhanced knowledge theory. The result is a new level of predictive management processes that rely on building and delivering profound knowledge faster and more effectively than ever before. The conventional ERP systems have tremendously improved order fulfillment and intra-organization business process workflow, but fell short to address the inter-enterprise business process complexities. The latter requires a full collaboration ecosystem that attracts valued customers and shareholders from all directions to share the pertinent business knowledge.
The leverage of human intellectual capabilities has been the focus of ERP II. This has not been the norm in the past as argued by Barker (2001) that manufacturing system effectiveness has been severely weakened by the inefficient use of human intellectual energy and that traditional measures of human inputs are simplistic and fail to identify vital contributions to developing value-adding capability. Directing and maintaining intellectual energy while attempting a restructuring or re-engineering program is seen as a typically difficult example of this much overlooked area. Gartner defined ERP II as “a business strategy and a set of industry-domain-specific applications that build customer and shareholder value by enabling and optimizing enterprise and inter-enterprise collaborative operational and financial processes”. This definition transformed the traditional back-office ERP system from internal transactional system into a complete value network system that incorporates the front-office functionalities for various partner communities. Integrating the front office with ERP indisputably offers an information visibility strategy that pushes the right information to the right people at the right time through the right communications channels.
The main objective behind the inter-enterprise application integration in ERP II systems is to share data, information, and knowledge to eventually improve the organization effectiveness, efficiency and innovation. ERP II philosophy also deems the customer a focal point for all business activities. This scheme satisfies the global enterprise’s needs by unifying and synchronizing valued-customer touch points. Customer requirements can be captured in knowledge maps, sales automated workflows, catalogs, and knowledge bases that are embedded in the best-of-breed tools. These tools assist in the immediacy and the transparency of actionable information that leads to real-time decisions.
ERP II is a competitive strategy that integrates a centralized, core ERP system with highly specialized solutions such as supply chain management (SCM), customer relationship management (CRM) and knowledge management (KM).This collaborative integration of the entire value network increases information transparency, speeds the decision-making process, and decreases response time. When implementing ERP II, the company is morphed into a social community that coalesces, synthesizes, and diffuses domestic and exotic knowledge
The collaborative CRM part of ERP II culminates in the “extended enterprise knowledge” in which product data management and eventually product development processes are not limited to the walls of the factory, but rather function as a collaborative network with no boundaries to innovation. Sharing of knowledge among all business actors, including competitors (in a coopetitive environment), is a paradigm shift in the life cycle of the economy.
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About The Authors:
Mirghani S. Mohamed, Ph.D., D.Sc. Information
Systems & Services, The
Adam Fadlalla, Ph.D. Computer and Information
Science,