EDI, ERP and E-Commerce: What You Don't Know CAN Hurt You

Author(s):

Lee A. Buddress, Ph.D., C.P.M.
Lee A. Buddress, Ph.D., C.P.M., Assistant Professor, Portland State University, P.O. Box 751/SBA, Portland, OR 97207, (503) 725-4769, leeb@sba.pdx.edu
Alan R. Raedels, Ph.D., C.P.M.
Alan R. Raedels, Ph.D., C.P.M., Professor, Portland State University, P.O. Box 751/SBA, Portland, OR 97207, (503) 725-3728, alanra@sba.pdx.edu

85th Annual International Conference Proceedings - 2000 

Abstract. Today, we rely on a vast array of computer-generated information to aid us in our jobs. From calculating safety stocks to finding information on the internet, we use technologies to help make business decisions. Use of those tools without understanding their underlying logic often leads to difficulty. Relying on computers to calculate order quantities or safety stocks is risky unless the method of calculation is known. While e-commerce is fast and convenient, it too has risks. Enterprise Resource Planning systems are being installed at many firms throughout the world; however, selecting and installing those systems and entering data correctly is crucial to their success. This paper will identify and discuss some of the difficulties and risks of the technologies we use and examine ways to address them.

Introduction. The old saying, "What you don't know won't hurt you," may have been appropriate for another era, or even in the raising of children. However, it may be painfully - even disastrously - untrue in supply and logistics. Another old saying, "Knowledge is power," also may no longer be valid. Today it may be that the real power is in knowing how to use the technical tools to get at all of the knowledge technology makes available.

Enterprise Resource Planning (ERP) systems are expensive, complex and at times painful in their implementation. Conversely, they enable organizations to establish a single, central database and facilitate tying the organization to its customers and suppliers. System selection and implementation are key issues for supply managers.

Electronic commerce is rapidly becoming a standard tool of supply managers and is dramatically changing supply and logistics operations. The implementation of this technology brings with it increased transaction speed and improved supply chain communications, but poses problems, as well. Dealing with e-commerce suppliers from different regions or countries increases the difficulty of assessing supplier capability and qualifications.

Underlying both of these electronic trends is the importance of accurate data. Supply managers will now become reliant on central databases and electronically transmitted information to make decisions. Using artificial intelligence, the technology itself, may even make decisions. Choices and actions are ever more dependent on data supplied by others.

All of these issues highlight the importance - even the absolute necessity - for supply managers to be proficient in supply and logistics tools and techniques such as forecasting, inventory management and logistics. In addition, it is imperative that the technologies' intricacies be understood. Several examples may serve to illustrate these points.

Enterprise Resource Planning. In his recent book, The Process Edge, Peter Keen discusses the five types of processes found in typical organizations. The first is an Identity Process. That is the process by which the organization's customers know it. In the book's example, the identity process for FedEx is guaranteed overnight delivery. Immediately below are Priority Processes. Those are ones that must function smoothly for the Identity Process to work. In the case of FedEx, those might be aircraft maintenance and crew scheduling. The third set of processes Keen classifies as Background. Those are usually administrative and include accounting, finance and perhaps information systems. Mandated Processes are ones which are done, not by choice, but by requirement, such as taxes, and EPA or OSHA compliance. Finally, there are Folklore Processes - ones that have been done for years, yet no one knows why. These should be eliminated when encountered.

An organization's competitive advantage - its distinctive competencies - come from its Identity and Priority Processes. Those are the ones from which the organization derives its revenues. However, it is often the case that top management, along with Background and Mandated Process personnel make choices about software. Operating departments must then adapt to the new software, often to their detriment. This, then, is one of the challenges for supply managers - understanding ERP systems, their intent and their capabilities sufficiently to become involved in their acquisition and implementation. Beyond that, leading edge firms are finding new and innovative ways to utilize the technologies to create even greater competitive advantage. Failure to understand ERP complexities and capabilities can have the opposite effect, however.

Two examples familiar to the authors demonstrate these issues. In the first, a major sports distributor shifted to new software which failed to perform as expected. They decided to switch from the old to the new without operating the two in parallel until the new system was proven. As a result, they lost control of their entire nationwide inventory and literally could not ship product for several months. Similarly, a major manufacturer also switched off the old and on the new ERP system without parallel operation. They completely lost control, not only of their inventories, but of their entire manufacturing floor, as well. Customer orders, during the time it took to reestablish control, ranged up to three months late. Needless to say, marketshare suffered greatly at both firms. In both cases, the system selection was largely driven by those in information systems, finance and accounting with minimal operations input.

What's the next step beyond ERP? Some believe that the present monolithic structures of today's ERP systems will soon be supplanted by backbone systems incorporating standard interfaces. These systems will allow the integration of modules from a variety of sources. In theory, a 'plug and play' approach will enable organizations to upgrade or change modules individually. How important is it for supply and logistics professionals to know the direction of development of the tools of our profession?

Electronic Commerce. Supplier qualification and selection is a fundamental task of supply managers. In an electronic environment, where suppliers are accessible worldwide, gaining understanding of a supplier's capability and capacity may be problematic. At the retail level, a website selling higher quality jewelry and gemstones is operated by an individual who owns no inventory. He borrows pieces from a wholesale jeweler, photographs and returns them, then puts the photos on his website for customers to order. Many stories have been told about suppliers operating out of garages. This may become more common in e-commerce.

Supply managers use e-commerce for two primary functions: as a transaction tool, and as an information tool. It is expected that these tools will improve decision-making and reduce transaction cost. Electronic commerce enables supply and logistics strategy implementation as long as the technology is truly understood and its capabilities exploited. Otherwise, all that is accomplished is the automation and perpetuation of existing (and often outmoded) processes.

Database Accuracy. One of our students responded to an exam question about cost analysis by relating a situation from her job as a purchasing agent. A prospective supplier, in making a proposal presentation, had developed extensive spreadsheets to demonstrate their cost structure. They had then added their required margin - twenty percent - to their total cost to arrive at their selling price. All of this information was freely shared with the buyer. The spreadsheet application had nicely performed all of the necessary calculations to support their quote. It took the buyer two days to figure out why the supplier's price was so low. The spreadsheet had subtracted the margin from total cost, rather than adding it on. Her comment was, "Never let your salespeople calculate price." Unquestioned reliance on the technology, in this case, caused only significant embarrassment. It could have been enormously expensive.

One company with whom the authors work has recently implemented and ERP system. The employees on the shop floor were having a difficult time adapting to the new processes. It now takes many more screens to retrieve necessary information than previously, and because of entry errors or omissions in transfer of data from the old system to the new system, the employees didn't trust its instructions and found it easier to revert to paper information, bypassing the new system, entirely.

As a consequence of these difficulties, one of the machine operators, with the very best of intentions, made his own adaptations. His machine was one requiring lengthy and costly set-ups. He received instructions from the system to set up his machine and produce seven complex, custom parts. He reasoned that since frequently the system quantities were in error, and since at times there were downstream assembly problems resulting in scrapping of one or more of his parts, he would make extras. His intent was to save for his employer the expense of an extra set-up to run just one or two parts. Consequently, he set up and ran nine, not seven, parts. Database accuracy was compromised in several ways.

There were at least four negative consequences from his well-intentioned actions. First, raw material inventory was now in error by two units. Capacity allocation at that machine center was now also in error, since planning was for the time necessary to set up and run seven pieces, so all subsequent work scheduled through that machine was now late. What if the assembly process proceeded without difficulty? There then existed two custom parts into which all costs had been sunk, and for which now existed no use. Finally, by making the two extra parts, assembly quality and process problems were obscured by extra inventory. If the expensive set-up were necessary to produce one or two parts, hopefully the process problems would be highlighted and resolved.

At another firm visited by the authors, supply managers and buyers relied on their ERP system to calculate inventory levels and safety stocks. Unfortunately, the means of making those determinations was not known. There are, for example, several different formulas for calculating safety stock, ranging from simple to complex. The range of differences for answers is equally broad - perhaps as much as four to five times as much, depending on the method used for the calculation. Inventory levels, investment, turn rates and service levels can be significantly impacted by the outcome. Similarly, computer-generated forecasts are suspect until the methodology is known.

It is critically important that supply managers understand what methods are used by the technology to generate information on which important decisions are based. Credibility can not be established until methodology is understood. This illustrates the importance of fundamental understanding of supply and logistics tools which are being utilized by the software.

Employers and recruiters today expect and demand skills to increase precision of all operations. Advanced forecasting tools are essential, as are inventory and supply chain modeling methodologies. Technology tools of e-commerce are required for purchasing, transaction and shipment tracking and even electronic payment.

Conclusions. Four core issues emerge from this discussion. First, it is an absolute that supply and logistics professional must become truly conversant with emerging technologies to maintain and advance the competitiveness of their organizations. This doesn't mean just knowing how to use a few software programs. It requires real expertise plus a vision of technological direction. This applies to both ERP systems and to e-commerce. On a personal scale, lack of these skills is truly career-limiting, today.

The use of e-commerce as a supply and logistics tool is the next issue. Aside from the obvious communication ease and speed, sourcing becomes both easier and more perilous in e-commerce. Information about sources is now voluminous - from local to global. On the more difficult side, has a particular search engine overlooked a good supplier because of its search processes? It has been estimated that even the best of search engines may capture no more than forty to fifty percent of existent websites. As noted above, the supplier qualification process may be more difficult, as well.

The third issue is the importance of data integrity. Sources of information available from central databases of ERP systems and their derivation. Where did the data come from, who contributed it and how was it calculated or derived. This also carries the companion imperative - that everything entered into the system - by everyone in the supply and logistics must be faultless, since others will now be accessing that information to make decisions. One further thought. Do you know all of the users or viewers of the information you enter into your ERP database?

Finally, since one of the fundamental objectives of supply and logistics is the creation of competitive advantage, thinking beyond tomorrow is imperative. What is the most imaginative application of current technologies as far as - say - five years from now? What new uses or technologies can we envision? What must be done now to capture, five years from now, the ultimate capabilities of the technologies and their competitive advantages? In the technological world which is now the domain of supply and logistics professionals, what you don't know truly can hurt you.


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