Electronic marketplaces versus enterprise resource planning ...

Electronic marketplaces versus enterprise resourceplanning: a comparison and decision methodology forsupply chain management

Markus Biehl* and Henry Kim

Schulich School of Business, York University, 4700 Keele St.,Toronto, ON M3J 1P3, CanadaE-mail: [email protected]: [email protected]*Corresponding author

Abstract: This paper addresses a firm's decision of whether to rely on thesupply chain capabilities of enterprise resource planning (ERP) systems orto make use of electronic marketplaces (EMPs). The functionalitiesprovided by the technologies, their costs and benefits, and strategicconsiderations are discussed as variables relevant to this decision. Thetradeoff also depends on the firm's current level of capabilities and theprocesses that ensure its competitive advantage. Upon the analysis of thesedecision factors, the paper develops a decision methodology for theselection of these information technologies. The qualitative andquantitative decision models that are developed can together be used tomake the decision between ERP systems and EMPs and the mix of internaland external supply chain capabilities. The qualitative model aids in thechoice between an ERP system and an EMP and is based on a lifecycleapproach. The quantitative model, a nonlinear mixed integer programme,can be used to mix and match different ERP systems or parts thereof withor without EMPs.

Keywords: business-to-business; electronic business; electronic marketplaces;enterprise resource planning; internal and external capabilities; supply chainmanagement.

Reference to this paper should be made as follows: Biehl, M. and Kim, H.(2003) `Electronic marketplaces versus enterprise resource planning: acomparison and decision methodology for supply chain management', Int.J. Technology, Policy and Management, Vol. 3, Nos. 3/4, pp.262±284.

Biographical notes: Markus Biehl is an Assistant Professor of Operationsand Information Management at York University's Schulich School ofBusiness. He holds an MS in management and manufacturing engineeringfrom the University of Kaiserslautern, Germany, and an MS and PhD fromthe Georgia Institute of Technology. Prior to joining Schulich, Dr Biehlchaired the Operations Management department at the InternationalUniversity in Germany's Business School. His research interests includeenvironmentally conscious manufacturing strategies, (green) supply chainmanagement, and business-to-business e-commerce.

Int. J. Technology, Policy and Management, Vol. 3, Nos. 3/4, 2003262

Copyright # 2003 Inderscience Enterprises Ltd.

Henry Kim is an Assistant Professor of Information Systems, also at theSchulich School of Business. He is interested in information systems thatfacilitate data and knowledge for enterprise modelling, knowledgemanagement, and e-commerce. His articles have appeared in journalssuch as the Communications of the ACM, Internet Research, BT TechnologyJournal, Business Process Management Journal, and Operational Research:an International Journal. He has consulted to industries and researched inlaboratories in Canada, the US, the UK, and Australia. He received a PhDin Industrial Engineering from the University of Toronto.

1 Introduction and problem statement

Rapid changes in information technology have had a major impact on how firms aremanaged. The greatest change has occurred in data intensive business functions,including finance, accounting, and supply chain management. In supply chainmanagement, the use of information technology has allowed firms to connect to theirsuppliers and customers to exchange inventory and demand data and to improveplanning, execution and control of supply chain functions, including logistics andmanufacturing. The results have been tremendous in terms of cost savings andcustomer service [1,2]. The information technologies that facilitated these changesoriginally comprised electronic data transfer, then materials or enterprise resourceplanning systems and, more recently, electronic marketplaces (EMPs) [3].

Over the past few years, firms have been pushing towards implementing ERPsystems and using EMPs to integrate their internal and external supply chains. Thesetechnologies offer overlapping supply chain capabilities. When a firm places anorder, either system is capable of administering the order, transmitting it to thesupplier, and generating the appropriate logistics forms such as the bill of lading. Ifan order is received, either system can generate invoices, transmit them to thepurchaser, and generate logistics information. So which system should a firm choose?Should it implement a potentially costly ERP system when anecdotal evidencesuggests that many firms achieve a negative return on such an investment [4] and thatERP implementations have been difficult and come with uncertain benefits [5]? Orshould the firm subscribe to EMPs with the danger of the EMP faltering [6] in theforeseeable future? When research indicates that 70% of all US high tech firms havesubscribed to at least one exchange but only 20% of them have actually performedtransactions online [6], are EMPs really worth the cost of programming the requiredinterfaces to the firm's information systems? Given the choice between using ERPsystems and EMPs, what should a firm implement to facilitate its supply chainactivities?

This paper attempts to shed light onto these questions by investigating therelevant decision factors, such as the costs and benefits of the respective technologyand the firm's strategy, and providing a decision methodology for the selection ofthese two information technologies. Important differences exist between thecapabilities of ERP systems and EMPs, but only one paper is known to havecompared the functionality of different ERP packages to each other [7]. Thiscomparison, however, is not detailed enough for the purpose of investigating supply

Electronic marketplaces versus enterprise resource planning 263

chain functionality. Moreover, since its publishing date, ERP vendors have addedsignificant improvements to their software packages. To our knowledge, ours is thefirst paper that directly compares the functionalities of ERP systems with those ofEMPs based on an extensive review of the trade literature.

The functionality of the chosen systems is a major factor in the decision of whichtechnology to use. Implementing an ERP system increases a firm's internal supplychain capabilities whereas using EMPs means that the firm accesses external benefits.The choice of internal versus external capabilities is determined by a firm's strategyand its core competencies [8]. However, the tradeoff between internal and externalcapabilities is examined within the literature mainly within the context of technologymanagement (e.g. [9±12]) rather than supply chain management. In this paper, weinvestigate the relevance of both streams of literature with regards to supply chainmanagement and the choice between ERP systems and EMPs to improve a firm'ssupply chain capabilities.

In the next section, we investigate the functionalities provided by ERP systemsand EMPs and critically compare them in terms of supply chain functionality. In thethird section of the paper, we extend the discussion of decision factors by addingstrategic considerations as well as the costs and benefits of implementing eithertechnology. In the fourth section, we introduce a qualitative and quantitativedecision model to help in making a selection using the decision criteria identified inthe previous sections. Lastly, we conclude the paper by summarising the mostimportant findings and suggesting further research.

2 Supply chain capabilities of ERP software and electronic marketplaces

In this section we discuss ERP and EMP capabilities in preparation for a criticalcomparison with a focus on supply-chain functionality. We take a historicalperspective since the roots of the technologies partially determine which functionalitythe systems provide.

2.1 ERP software

The origin of ERP systems can be traced to material requirements planning (MRP)applications. In the 1970s, MRP systems became popular with large manufacturingfirms dealing with many or complex products because of their ability to break downcustomer demand (`independent demand') into demand for components andmaterials (`dependent demand') and thus link a firm's demand side with its supplyside while helping the firm to control inventories and the shop floor [13]. In the1980s, manufacturing resource planning (MRP II) systems integrated MRPfunctionality with a firm's financial and marketing systems [14], thus reducing theneed for multiple data entry and improving data accuracy.

ERP systems are an extension of MRP II systems. ERP packages attempt tointegrate data flows across all business functions and include optimisation andreporting routines. SAP AG was the first software firm to release an ERP package[15]. In the late mid-1990s other software firms quickly recognised the trend andstarted designing similar packages. PeopleSoft issued a human resources package in

M. Biehl and H. Kim264

1989 and added other functions subsequently; JD Edwards, founded in 1977, issuedits first full ERP system in 1996 [16]; i2 Technologies, a leader in scheduling software,started offering enterprise-wide solutions in 1997; Oracle started with a financialpackage in 1989, added human resources and manufacturing in the following years,and issued a first integrated package in 1994.

Table 1 shows the supply chain functionality provided by the software of the fourlargest ERP vendors. While the functionality of other ERP packages has also beeninvestigated, only four are shown to conserve space.

Table 1 Overview of ERP supply chain capabilities of the four largest ERP vendors

Systems

SAP AG PeopleSoft JD Edwards Oracle

Manufacturing

1970s 1996 1996 1992

Supply chain

1995 Procurementautomation(e.g. orders)

1996 Internetcapabilities

1998 End-userordering, receiving,invoicing; Businessperformance

1999 Product DataMgmt (integrationw/logistics); web-hosted applicationsand portals(my.SAP.com)

2000 e-tendering,collaborativeprocurement

2002 Full view oftransactions, supplierqualification andselection, purchasing,contract negotiationand mgmt,relationshipmonitoring;Sourcing

1994 Purchasing,incl. comparisonshopping,bulk pricing

1995 Billing andadjustments,invoicing

1996 Order mgmt

1997 Web enabledmodule

1998 Order promising,demand planning;web-based self-service;Data warehouse,online analyticalapplications

1999 Internetstorefront, integrationwith SC mgmtmodule; EnterprisePerformance Mgmt

2000 Scheduling, &billing; invoicing;real-time ordering;web client

2001 Acceptance &translation of partners'data files into usabledata format;Promotions mgmt;Financial performance

1996 sales & ordermgmt, procurement,MRP

1998 Planning/scheduling, ordermgmt & tracking

1999 SalesConfigurator

2000 Onlinemarketplace;ERP fully web-enabled; Real-timepromise-to-deliver

2001 Web-enabledproductconfiguration;Order promising

2002 Collaborativeforecasting;web-based customerand supplier self-service

1994 Costing and billing;Link w/legacy systems;EDI and agent technology;Workflow; Mobileapplication

1995 Data warehousing;online analyticalapplications; web access toinvoices, payments

1996 Web customer &supplier applications; websupplier scheduling,repetitive ordering

1997 Industry-specificapplications; order mgmt;SC planning, order mgmtautomation, supplierscheduling (receipts,authorisations), productconfiguration

1998 Strategic procurement(spending patterns, trackoverages, supplier performance)

1999 Hosted e-commerceand ERP applications; salesanalysis; internet modules:CRM, SC & procurement;internet SC (virtual SC,collaboration, auctions);Order mgmt (self-service,guided selling); Procurement;Exchange (B2B commerce)


Table 1 Overview of ERP supply chain capabilities of the four largest ERP vendors

(continued)

Systems

SAP AG PeopleSoft JD Edwards Oracle

Supply chain

2002 Supplier rating& analysis;Requisitioning &purchase order mgt;Collaborative selling;trading partner mgmt;strategic sourcing;Mobile services;eSettlements

2000 Marketing campaigns& intelligence

2001 eBusiness(eCollaboration); SCexchange, Productdevelopment exchange,Exchange marketplace(design, planning,catalogue, auctions)

2002 Most eBusinessapplications mobile-enabled

Logistics

1995 Logistics

1996 Transportationplanning &scheduling, internetSC, capacity planning)

1997 SC mgmt

2000 Transportationplanning, vehiclescheduling,collaborative transportplanning

2002 Full SC visibility,supplier qualification,contract negotiationand mgmt)

2002 Integratedshipping w/3rd partylogistics providers

1991 Distributionplanning andexecution

1994 Warehousemgmt

1996 Inventorymgmt

1998 Warehouse &transportation mgmt

2001 Real timeinventory mgmt;web-distributionplanning

1995 Shipments

1997 Inventory visibility,fulfilment

2001 Transportationexchange (logistics services,shipping documents)

Legend: mgmt=management; SC=supply chain

Sources: Trade literature, press releases, and company websites

In comparing the supply chain functionality of the ERP packages, two importantinsights emerge. First, ERP software firms initially released their systems with verydifferent functionality (e.g. PeopleSoft focused on human resources, Manugistics onMRP) and implemented complete ERP packages with supply chain capabilities atdifferent stages. Most packages now offer full supply chain capabilities that includethe planning and execution of marketing activities (the demand side), shop floor andinventory management, ordering, billing, and invoicing, including the possibility ofdelegating ordering and receiving to the end-user (`desk top receiving'). Mostpackages also facilitate scheduling and optimising distribution through managementof logistics suppliers or transportation planning. Clearly, this functionality denotes asignificant increase in capabilities over MRP II systems and original ERP systems(see Table 2).


Table 2 Typical ERP software capabilities

Purchasing Contract Purchases

Blanket Purchases

Approved Source List

RFQ Capability

Update Order Status via Internet or EDI

ERPModules

Financial

Warehouse Management

Human Resources

Forecasting

Logistics/Distribution

Quality Control

Manufacturing Execution Systems/Shop Floor

Customer Relationship Management

Supply Chain Management/Planning

Markets Discrete

Repetitive

Complex

Automotive

Remanufacturing

Process

Pharmaceutical

Food & Beverage

Retail

Mixed Mode

Repair

Large Companies

Mid-sized Companies

Small Companies

Source: adapted from BHR Software Inc. [17]

Second, ERP vendors started implementing internet capabilities in 1995. Theyeventually included online ordering and sales, the linking of suppliers' andcustomers' ERP systems to the firms', online analytical processing to create (near-)real time processing and promising of orders and increase inventory visibility, andaccess to financial clearinghouses for online financial transactions. Software makershave also added functionality that allows linking ERP systems to EMPs and legacysystems. Collaborative sourcing has been incorporated into the packages as well ascontract negotiation and a variety of pricing procedures such as dynamic pricing andauctions. Moreover, to enable firms to actually use these features outside publiclyaccessible EMPs, SAP and i2 have set up private EMPs (www.mySAP.com andwww.TradeMatrix.com, respectively) in which their clients can trade with a set ofpre-defined partners.

Some ERP systems now attempt not only to help manage the complexities ofsupply chains, but offer proactive solutions that span from the design of marketingcampaigns to the preparation of manufacturing for these activities. For example,Manugistics' Enterprise Profit Optimization combines a cost reduction approachthrough supplier relationship management and supply chain management withrevenue-enhancing pricing and revenue optimisation on the demand side [18].

In conclusion, it is apparent that ERP systems seem well suited to providing firmswith a high level of internal supply chain capabilities spanning from shop floor controlto logistics planning and from supply management to marketing and demandmanagement. Given this high level of capabilities on the part of ERP systems onemight ask why a firm would choose to access external capabilities in the form of EMPs.


2.2 Electronic marketplaces

Whereas ERP systems have a comparatively long history of managing resources,EMPs are at the most only a few years old. They were incepted well after the advent ofthe internet. In comparison to ERP systems, their initial focus was on market-making(e.g. [19]). More recently, as many EMPs faltered, the remaining ones found thatoffering firms supply chain functionality was important to their survival.

The landscape of business-to-business EMPs is very crowded. By April 2002, morethan 1,700 exchanges were active [20]. For the purpose of this research the analysis ofEMP capabilities was carried out by selecting four well-known firms as representative.The firms were chosen based on their standing as a market-maker (a pure EMP, e.g.ChemConnect [19] and Coviscint [21]) versus a supply chain enabler (a firm supplyingsoftware for EMPs, e.g. CommerceOne [22] and Ariba [23]). Analysing thefunctionalities provided not only by major EMPs but also by the EMP-enablingsoftware provides a good overview of capabilities that can be offered by EMPs.Table 3 shows a comparison of the supply chain functionality currently offered bythe four firms. From Table 3 we note that both EMPs and software firms offersourcing functionality that automates the creation, placement and administration oforders and requests for quotations (RFQs), as well as order tracking and automaticpayment. Suppliers can be selected and new suppliers can be searched. Othercommonalities include collaboration tools, such as collaborative platforms orworkspaces that allow the real-time exchange of data and documents, supplierperformance evaluations, and integration with ERP and legacy systems.

Table 3 Capabilities provided by EMPs and EMP-enabling software

Electronic marketplaceSoftware firm providing EMP functionality

CommerceOne Ariba Covisint ChemConnect

Sourcing/Purchasing

Sourcing, sourcingintelligence; sourcingactivity reporting;purchase ordercreation (incl. RFxtemplates); purchasingapproval controls,approval processwith workflow andbusiness rules;purchasing cycleautomation

Quotation Analysis

Invoice-to-paymentprocess automation;payment terms mgmt

Order visibility/tracking

Sourcing analysis;procurementcompliance;benchmarking; orderrouting; orderaggregation; compliancemonitoring; full-cycleprocess integration

Plan-to-payautomation; paymentvisibility; invoicereconciliation

Supplier discovery(business, product, andcategory information),evaluation, andrelationship mgmt;suppliercommunications; onsuppliers

Sourcing: automatic thepurchase order approval andworkflow process; orderingfrom external websites via openinterface; requisitions usingcustomisable forms; real-timeorder tracking; inventorycontrol; request information forpurchase orders for non-catalogued items

Sourcing: Requestfor quotes (RFQ)automation;collaboration;electronicmessages;forecasting;inventory control;automatic ordergeneration

Request for newsuppliers;performancetracking; onlineaccount mgmt


Table 3 Capabilities provided by EMPs and EMP-enabling software (continued)

Electronic marketplaceSoftware firm providing EMP functionality

CommerceOne Ariba Covisint ChemConnect

Sourcing/PurchasingSupplier selection &management; self-service (availability,confirmations,advance shippingnotes, invoices,payments)

Supplier mgmt ofcatalogues, pricingand orders

Automated cataloguemgmt; sharing ofcatalogues

Quotations: real-time, electronicRfQ document creation/management (incl. electronicannouncement); revisiontracking; templated responses

Catalogue: refine content intointernet ready, transactionaldata; online catalogue datacreation and approval

Negotiation/CollaborationVariety of auctiontypes and bids

Structured one-on-one negotiation(single and multi-round)

Collaborative platform(visibility to legacysystems, onlinecollaboration, processmgmt); real-timeinformation exchange

Collaborativeworkspaces;electroniccommunication;exchange businessdocuments

Auctions: multi-variablebidding, multi-line items,messaging; overtime; proxybidding; public or privateauctions; multiple auction types

Collaboration: virtual projectteams; project mgmt; documentmgmt & revision control;discussion forums; workflowengine; visualisation of CADdrawings; conferencing andapplication sharing; e-communications

Real-time auctionformat

Non-anonymousnegotiation; privatenegotiations

Collaboration onthe sourcing andinventory mgmt,order fulfilment,procurement, andbusinessintelligence

ContractsCreation, review,negotiation, awardand mgmt of contracts

Automation ofcontract creation

LogisticsSharing of shipping planswith logistics providers;generation/transmission ofadvance shipping notices

Monitoring of railcustomers;execution oflogistics services;logistics intelligence

PerformanceSpending analysis bycommodity, supplier,project, or contract

Multi-dimensionalspend and supplierperformance analysis

Operationaleffectivenessmonitoring

Supplier keyperformance indicators

Supplier ratings; onlinesupplier reviews; milestonestatus control; supplierscorecards; supplier progress

Supplierperformancetracking

Supply Chain IntegrationIntegration with ERPs,back-office systems andbrowser infrastructures

Integration with ERPand legacy systems

Integration of back-endsystems

Integration withERP systems

Sources: Trade publications, company websites


Differences exist between the software firms and EMPs in terms of contracting andlogistics. First, CommerceOne's and Ariba's softwares offer the possibility ofcreating contracts, a feature not yet offered by EMPs. Second, while the EMPsoftware allows the management of suppliers and processes, only EMPs providereadily set up logistics solutions through using logistics service providers that act assuppliers in their marketplaces. This allows buyers and sellers to execute the shippingof their products and to generate all necessary shipping forms and information.

Table 3 also reveals other interesting insights. Ariba, while providingcollaborative workspaces, does not support auctions. This might stem fromAriba's mission to be a match maker between suppliers and buyers and from aphilosophy that stresses the collaborative over the competitive sourcing approach.ChemConnect's lack of support for catalogues and some other services availablethrough the software makers and Covisint points to its purely public nature andstems from its history as a match maker rather than a strong provider oftransactional capabilities. The analysis of other EMPs (E2open [24], Elemica [25,26],GHX [27], and Converge [28]) shows that EMPs usually do not implement allavailable supply chain functionality, leaving subscribers with the task of selecting theEMP(s) with the appropriate capabilities.

2.3 Critical comparison of ERP systems and EMPs

The previous discussion of ERP systems and EMPs reveals that both offeroverlapping supply chain functionality (see Table 4). In particular, ERP systemsonly lack the interactive capabilities of EMPs when they are not connected to asupplier network (value added network) or an EMP. In contrast, not all EMPssupport the creation and management of quotations, supplier management, auctions,or the measurement of operational performance (as opposed to the performance ofsuppliers). Moreover, EMPs do not usually support distribution management, i.e.the scheduling and management of a logistics fleet and network.

One of the major differences between ERP systems and EMPs is their focus. ERPsystems evolved from a focus on internal management of complexity and an integrationof data flows within firms. EMPs, in comparison, were conceived for the purpose offacilitating collaboration and connecting the demand side to the supply side to facilitatemarket mechanisms previously used only offline. ERP system markers have tried tointegrate connectivity into their packages by equipping their systems with thecapability to emulate multiple EDI standards and collaborating with EMP softwarefirms to implement market-making functionality such as auctioning. However, thesecapabilities can be used only if ERP systems are hooked up to EMPs or value addednetworks. Wal-Mart, for example, has linked many of its 25,000 suppliers to a VANand, as a result, improved demand forecasting and order-processing [20].


Table 4 Comparison of ERP and EMP supply chain functionality

Functionality ERP systems Electronic marketplaces

Selling/purchasing

Sourcing/purchasing + +

Sourcing, billing, payment automation + +

Quotations + o

Contract creation and management + +

Supplier management + o

Catalogue management + +

Interaction

Collaboration +

Negotiation +

Auctions o

Logistics

Logistics management +

Distribution management + x

Performance

Operational performance + o

Supplier performance + +

Integration

Supply chain integration + +

Legend: + Usually supported

Supported when connected to supplier network or EMP

o Supported by some EMPs

x Usually not supported

In contrast, using an EMP's connectivity gives immediate access to a base ofpotential suppliers and customers in proportion to the EMP's size. At worst, a firmcan use a web-interface to submit requests for quotations or bids and interact with itssupply chain partners. Moreover, using an EMP's functionality, the firm can takeadvantage of automatic order processing, invoicing, and billing once all appropriateinformation has been keyed in. However, while such a sourcing or sales system mightbe viable for a firm with few transactions, it will not suffice for most other firms. Giventhat order information is intrinsically linked to the demand side, typing in orderinformation by hand is not a feasible solution for firms with a complex manufacturingstructure or demand for a number of different products (i.e. a wide scope of orders)[29]. Moreover, EMPs by themselves do not provide an integrated approach thatincludes order promising (except from inventory) or profit maximisation mechanismsuch as offered by Manugistic's ERP solution. It is unlikely that EMPs will ever offerthis solution, unless they are integrated with an ERP or similar system.


Having discussed commonalities and differences between ERP systems andEMPs, we now proceed to investigate the firm's decision of which technology toimplement.

3 Strategy, costs, and benefits: further decision factors in choosing a supplychain solution

Recall that, apart from functionality, a fundamental difference between ERP systemsand EMPs also lies in the generation of supply chain capabilities. The implementationof an ERP system usually represents a significant increase in a firm's internal supplychain capabilities. Drawing on the existing literature, White [10] finds that firms aremore likely to engage in external capabilities when there is a low level of technicaluncertainty. This certainty is not necessarily a given for EMPs, as is reflected in thespeed at which new features are added and the fact that numerous EMPs close downonly a few years after their inception [6]. Even if firms used EMPs more extensively,technological uncertainty would prevent them from internalising capabilities [11],further indicating that a firm with a low level of internal supply chain capabilities willbarely benefit from EMPs in terms of learning or experience. In fact, from recentresearch we can deduce that, in order to use EMPs effectively, firms need to havesuccessfully reengineered their business processes, possess extensive knowledge abouttheir EMPs and their procedures, and understood the cause-and-effect relationshipsfor their EMP activities [9]. These findings make clear that it is not entirely possibleto substitute internal with external supply chain capabilities. Instead, regardless ofthe firm's choice, a certain level of internal capabilities is needed to effectively useEMP functionality.

A discussion of internal versus external capabilities (i.e. ERP systems versusEMPs) needs to also consider a firm's competitive advantages [30] which are vital toa firm's long-term survival. Competitive advantages have usually been developedover a long period of time and are typically more difficult and expensive to changethan comparative (short-term) capabilities (also see [8]). Clearly, if a supply chainprocess provides a competitive advantage to the firm, it should be kept in-house [31].In other words, processes critical to a firm's business should not be outsourced toEMPs, where they can easily be replicated by a competitor. Instead, the firm shouldcontinually improve those internal capabilities to main the competitive advantage. Itmay use business process reengineering tools to simplify these processes [32,33] orimplement an ERP system to further improve their performance.

So far, we have considered exclusively qualitative decision variables for selectingan internal or external supply chain solution, including supply chain functionalitiesprovided by ERP systems and EMPs as well as strategic factors. The last category ofdecision variables, the costs and benefits of the two technologies, is mostlyquantitative in nature.

The cost of a supply chain solution consists of two parts: the fixedimplementation cost and the variable usage cost. ERP systems are usuallyimplemented internal to the firm and, therefore, present a large fixed setup costwith a relatively small variable license and maintenance cost. For example, a recentsurvey of US manufacturers found that, on average, firms spend almost 6% of their


annual revenues (those with less than $50 million annual revenues spend an averageof 14%) on ERP system implementation, with more than 40% spending less than $5million [2]. Recall, however, that some supply chain functionalities cannot be usedunless the system is connected to an EMP or VAN. Hence, the fixed cost of providingconnectivity for the ERP and the variable cost of the VAN or EMP must be added ifit is desired.

An EMP, on the other hand, requires only a small fixed cost to link it to thefirm's information systems. This fixed cost can range from a few thousand to a fewmillion dollars, depending on the complexity of the interface required. However, theEMP's variable costs may be higher than those of an ERP system. For example,ChemConnect charges between 0.2% and 2% of the transaction volume [34], whichmay significantly impact a firm's profit margin if it operates in a competitiveindustry. In contrast, value added networks are more costly to set up than EMPs, butoffer a lower variable cost.

In terms of benefits, almost 70% of ERP users receive a return on theirinvestment of 16% or more [2], a number that satisfies most internal rates of returnand largely refutes anecdotal evidence of disastrous implementation results [4,5]. Themost important qualitative benefits of ERP systems include a shorter informationresponse time, an increased interaction across the enterprise, a shorter order cycle,and an improved interaction with customers and suppliers [2]. In comparison, about33% of the firms which used EMPs claim that `investments in selling online toconsumers are paying off. But less than 20% say extranets, electronic supply chains[. . .], and electronic marketplaces have produced returns' [1]. This finding is in starkcontrast to the cost reductions promised by the EMPs (e.g. [19]). The reason for thismight be that EMPs tend to be more profitable for buyers than for sellers.Qualitative benefits from EMP participation include `improved customer service,greater knowledge of their customers' preferences, a greater presence in theirmarkets, improved brand recognition and increased efficiency of supply chains/reduced processing costs' [1].

The costs and benefits are related to the order volume a firm transacts over theERP system (connected to customers or suppliers) or the EMP. For the purpose ofthis analysis, the order volume is classified along two dimensions: the order scale andthe order scope. An increase in the order scale means that the order volume increases,but not the variety of items procured. An increase in the order scope represents anincrease in the number of different items ordered but not necessarily an increase inthe order scale.

The impact of the order scale and the order scope on the choice of an ERPsystem versus EMP can be easily illustrated. In the simplest case, which holds formany small and some medium-sized firms, supply chain activities are performedmanually and orders are submitted by mail, e-mail, or fax. An increase in the orderscale will not have an impact on the efficiency of the ordering system, only on thetransaction cost which is usually proportional to the transaction volume for EMPsand constant for VANs. Given that the firm has been typing in orders to start offwith, an EMP's supply chain capabilities provide a significant simplification of thesupply chain process. In addition to reducing the transaction costs, reducing errorsdue to the partial automation of processes, and extending market reach, using anEMP's negotiation or auction functionality as well as order aggregation


mechanisms (if offered) usually also results in lower sourcing prices [1,19,21].If a firm's order scope grows, however, it must start using more efficient ordering

methods. Clearly, an ERP system is well suited to managing the complexity thatcomes with a growing scope of items and, hence, would be the preferred technologychoice. For example, orders can then be generated and printed automatically ordirectly faxed to suppliers through the ERP system. As a result, the firm can expecta higher quality of information, better inventory management, and decreased ITcosts [2].

Having discussed all relevant decision variables in this section, the next sectionintroduces two models that support the decision between an ERP system and the useof EMPs.

4 Decision models for selecting supply chain capabilities

In this section, two models are introduced that provide a methodology for decidingbetween an ERP system and an EMP solution. First, a qualitative model isintroduced which can be used for strategic level planning. Once this model has beenapplied, the quantitative decision model may be used for the selection of anoperational solution. The operational solution involves the actual choice of an ERPsystem or components of multiple ERP systems either as a stand-alone solution or inconjunction with one or more EMPs.

4.1 ERP/EMP integration model

The following qualitative decision model is based on the above discussion of thedecision factors and considers the firm's strategy in terms of competitive processes aswell as the order scale and order scope as proxies for costs and benefits. Recall thatprocesses that provide the firm with a competitive advantage tend to result in aninternal solution. EMPs may be used for less critical processes. Moreover, as its orderscale grows, a firm can take advantage of EMPs to gain cost reductions in thesourcing process. As the order scope increases, however, an ERP system is needed tohelp the firm manage the growth in complexity. Examining these findings within thecontext of a choice between ERP systems and EMPs and borrowing from thelifecycle approach (e.g. as used in the BCG product matrix) leads to the ERP/EMPIntegration Model shown in Figure 1.


Figure 1 ERP/EMP integration model

Figure 1 classifies a firm's current state according to its use of ERP systems andEMPs (see Figure 1) and shows the possible progressions through the technologylandscape. In the simplest case, a firm is performing all supply chain processes eithermanually or with the help of non- or partially integrated legacy systems (Island). Thisstate is appropriate for firms with a small order scope and order scale. Sensitiveprocesses are performed internally.

If the firm then experiences an increase in the scale of orders, it may takeadvantage of using an EMP. This state is termed External Integration. Internalsupply chain processes are still performed as in the Island state, external supply chaincapabilities such as purchasing and billing automation help the firm decrease thetransaction cost while the access to a wider range of suppliers as well as negotiationand auctioning mechanisms may reduce the cost of products. Note that the firm mustbe careful to keep sensitive processes in-house. However, as the firm grows and itsorder scope increases, it must consider transitioning to a fully integrated state. Thestate of Full Integration marries internal with external supply chain capabilities andgives the firm the possibility of taking advantage of the full range of supply chainfunctionality offered in the market. The path from Island through ExternalIntegration to Full Integration is taken by many growing small and medium sizedfirms. Again, while taking the last step, the firm must be careful not to outsourceprocesses that provide a competitive advantage.

If, on the other hand, the firm's order scope grows, it is advisable to firstimplement an ERP system to reach the Internal Integration state. This is the pathmost manufacturing firms have taken as they deal with complex product structuresand benefit from the management of the resulting order scope. The firm increases itsinternal supply chain capabilities and keeps all competitively relevant processesin-house. As the order scale starts increasing, however, the firm must considerintegrating its ERP system with an EMP or VAN to take advantage of collaborativeand logistics functionality that can be achieved only with integrated systems. Hence,the firm reaches a state of Full Integration. More than 30% of US manufacturersprogress along this path [2].


Lastly, starting out from the Island state, a firm may directly progress to theFully Integrated state. This transition is appropriate if the order volume grows interms of both scale and scope. Due to the mix of internal and external capabilities,the firm has the choice of keeping important processes in-house while takingadvantage of EMP connectivity. About 20% of US manufacturing firms have takenthis route [2]. Again, when choosing this path, the firm must be careful todifferentiate between strategically important and less important processes. Theformer should be handled by internal systems; the latter may be implemented usingeither an internal or external solution.

Once the strategy for an ERP/EMP implementation has been chosen, thequestion still remains which systems and EMPs to select. Clearly, making this choiceis a function of what these alternatives offer and how much they cost. In thefollowing section, a decision model is developed that helps in making this decision.

4.2 Mixed integer non-linear decision model

The ERP/EMP Integration Model can be successfully used as a strategic-levelplanning tool. Once the firm knows which path to take, the following model can beapplied to aid the firm in selecting a set of ERP system(s) and EMP(s).

To find an operational solution to the decision problem, it is useful to firstnarrow down the alternatives to a few ERP systems and EMPs. Given the discussionof decision factors in Sections 2 and 3 of the paper, the firm must determine thefollowing information about the systems:

* the functionalities offered by each of the candidates by themselves

* overlapping functionalities particularly between ERP systems and EMPs

* the fixed and variable costs and benefits associated with the candidates.

Typical costs and returns of ERP systems and EMPs are given in the previous sectionand can be found in [1] and [2], respectively. In addition, an estimate of the cost ofintegrating each ERP system with each EMP must be made. The cost and benefits foreach candidate may then be aggregated and discounted over the decision horizonusing an internal rate of return.

These data are used in a mixed integer non-linear decision model to derive themost beneficial solution (see below and Table 5). In the simplest case, the solution ofthe proposed optimisation model may consist of implementing only an ERP package,using only an EMP, or implementing a combined solution. In other words, thequantitative model is capable of suggesting the firm's optimal position in thequalitative model introduced above.

Max z �Xi

PRiXi �Xj

PMjYj ÿXi;j

HRMijXiYj ÿXj;l6�j

HMMjlYjYl ÿXk

UkZk �1�

s:t:Xi

CRikXi �Xj

CMjkYj ÿXi;j

CRMijkXiYj ÿXj;l6�j

CMMjlkYjYl

� Zk � Lk8 k 2 f1; 2; . . . ;Kg�2�


Xi

Xi � 1 8 i 2 f1; 2; . . . Ig �3�Xj

Yj � n 8 i 2 f1; 2; . . . ; Jg �4�

Zk � 0 8 k �5�

Xi;Yj 2 f0; 1g8 i; j �6�

Lk 2 �0; 1�8 k �7�

Table 5 Variable definitions for the nonlinear decision model

Xi = Decision variable indicating whether ERP system i 2 f1; 2; . . . ; Ig isimplemented; Xi 2 f0; 1g

Yj = Decision variable indicating whether EMP j 2 f1; 2; . . . ; Jg is implemented;

Yj 2 f0; 1g; note that I 2 f1; 2; . . . ; Jg is used interchangeably with j whereinteractions between EMPs are represented

Zk = Decision variable indicating to which degree supply chain functionalityk 2 f1; 2; . . . ;Kg does not meet the firm's needs; Zk 2 �0; 1�

PRi = Expected discounted payoff (benefits±costs over the decision horizon) of

implementing and using the ERP System i

PMj = Expected discounted payoff of linking and using the EMP j

HRMij = Discounted cost (benefit) of introducing ERP system i and EMP j at the sametime and linking the systems to each other

HMMjl = Discounted cost (benefit) of introducing the set of EMPs j and l, with j 6� I, atthe same time and linking the systems to each other

Uk = Unit cost of not meeting the desired level of supply chain functionality k;

Uk � 0 8 k

CRik = Capability level of ERP system i for carrying out functionality k; Cik 2 �0; 1�,where 1 represents the highest possible capability level across all ERP systemsand EMPs

CMjk = Capability level of EMP j for carrying out functionality k; CMjk 2 �0; 1�CRMijk = Interaction term for combined capability levels of ERP system i and EMP j for

carrying out functionality k; CRMijk 2 �0; 1�CMMjlk = Interaction term for combined capability levels of EMPs j and l, with j 6� I, for

carrying out functionality k; CMMjlk 2 �0; 1�Lk = Capability level L desired by the firm for functionality k; Lk 2 �0; 1�n = Number of EMPs to be subscribed to


Equation (1) depicts the objective function that maximises the payoff from theselection of an ERP system and/or EMP(s). The decision variables, Xi and Yj, arebinary and represent the selection of ERP systems and EMPs, respectively. Theobjective function considers the expected discounted payoffs from the ERPs (PRiXi)and EMPs (PMjYj). In addition, the objective function contains the cost of theselected solution not providing the required supply chain functionality(ùnderperformance cost', UkZk), and the cost (benefit) of introducing two systemsat the same time (economies of scale) and linking the ERP system with the EMP(ìntegration cost', HRMijXiYj). Note that the integration cost is non zero only if aset of systems has actually been chosen. In addition, if multiple EMPs are chosen, theEMP interaction cost, HMMilYjYl, may be invoked in the case overlapping benefits.The interaction cost can be used to reflect the possibility that the sum of thediscounted benefits of the EMPs is greater than the actual benefits derived. SinceEMPs are frequently chosen to complement rather than substitute another, however,the interaction cost term will frequently be negligible.

The first set of constraints (Inequality 2) models the levels of all functionalities(k � 1 through K) provided by the ERP systems (CRik), EMPs (CMjk), andinteraction terms between the ERP systems and EMPs (CRMijk). The levels of thefunctionalities are scaled between 0 and 1 (see Equation 7), where 1 represents theestimated highest level of functionality possible considering any solution currently onthe market (i.e. the benchmark). The sum of the selected functionalities must be atleast as great as the required functionality, Lk. If a selected solution does not meetthis requirement, Zk becomes non-negative to invoke the underperformance cost,UkZk, of the missing level of functionality k. If a certain functionality is important tothe firm, the associated unit underperformance cost, Uk, will reflect this fact and steerthe firm clear of sub-optimal technology.

Moreover, Inequality (2) contains an interaction term (CRMijkXiYj) that adjuststhe overall levels of functionality for the amount different systems overlap in terms offunctionality. For example, if the firm's pre-selected options contain an ERP systemand an EMP whose sourcing functionalities overlap, this fact would be reflected inthe interaction term to ensure that those functionalities are not double counted. Notethat this term does not correspond to the integration cost term in the objectivefunction. Similarly, the interaction term CMMjlkYjYl adjusts for functional overlapsbetween multiple EMPs.

Equations (3) and (4) ensure that only one ERP system and n EMPs are selected,respectively. The fourth constraint explicitly allows for the selection of multipleEMPs since firms often subscribe to a portfolio of EMPs to access significantlydifferent functionalities. The number of EMPs allowed, n, can be adjusted to reflectthe firm's need.

The set of Inequalities (5) ensures that the decision variables associated withthe underperformance cost, Zk, remain non-negative. This has the effect thatover-performance along the supply chain functionalities, k, is not rewarded since thefirm essentially implements unusable òvercapacity'. Lastly, while the variables Zk

are real numbers, Equation (6) ensures that the ERP and EMP decision variable arebinary.


The quantitative decision model is simple in nature and basically helps in the task

of makingnk

� �comparisons, where k represents the number of ERP systems and

EMPs (or parts thereof) to be chosen and n the total number of ERP systems andEMPs considered. Note that this number decreases if n is partitioned into ERPsystems and EMPs and a certain number of each has to be chosen. In this case, thenumber of combinations decreases to:

Number of ERPs consideredNumber of ERPs to be selected

� �Number of EMPs considered

Number of EMPs to be selected

� �:

Clearly, since some firms pick and choose modules from different ERP systems andmany more subscribe to a few EMPs at the same time, the number of optionsinvestigated (k) is large and, hence, a direct enumeration of possible solutionsbecomes tedious even for smaller problem sizes and nearly intractable for largeproblems. This model helps in evaluating those options by taking into account boththe functionalities offered and the expected monetary consequences. A strategy forapplying the model will be discussed in the next section.

The model can be easily expanded or modified. First, it can be modified to allowfor the selection of a portfolio of multiple parts from different ERP systems anddifferent EMPs. In this case, the binary restriction on Xi and Yj (Equation 6) can bedropped and an interaction term introduced into Inequality (3) that takes into

account the ERP systems' functional overlap (ÿ Pi;m 6�i

CRRimkXiXm, with i;m 2�1; 2; . . . ; I �). Moreover, the constraint on the number of ERP systems (Inequality 3)is relaxed and the payoff and cost terms in the objective function (PRi, PMj, PRMij,Uk, HRMij, and HMMil) may be modelled as linear or non-linear functions of theimplementation levels chosen (Xi and Yj). Alternatively, to obtain more detailedresults, the decision variables can be modified not to represent whole systems anymore but different functionality/system combinations. In that case, since moduleswith the same functionality would not be chosen from different ERP systems, theinteraction term discussed above would not have to be introduced to Inequality (3).

Second, if the firm finds that a particular combination of an ERP system andEMP is unsuitable for reasons of functionality or difficulty of integration, aconstraint can be introduced that excludes that combination from the optimalsolution. For example, if ERP system i and EMP j are not to be selected together, theconstraint would be XiYj � 0 or, if the decision variables are binary, Xi � yj � 1. Anycombination of ERP systems and any combination of EMPs may be excluded fromthe optimal solution in a similar manner.

Third, if the firm considers using multiple EMPs for placing orders, it may not beable to achieve economies of scales that are as high as if the number of EMPs (orsuppliers in general) is severely limited. This effect may be modelled throughincluding a term in the objective function that decreases the total benefit from thesolution at a non-increasing rate with the increase in the number of suppliers.

Lastly, based on the experience of a senior ERP systems consultant, whenchoosing between ERP systems, the ease of using an ERP system can be an issueinfluencing the final decision. The model can be expanded to include such aconstraint in the following way:


SRi Xi � �1 � A1 �8a�

SMj Yj � �2 � A2 �8b�where � represents a term that measures the inconvenience of not using a user-friendlysystem in relation to A, the desired level of user-friendliness, and SRi and SMj

represent the level of user-friendliness of ERP i and EMP j, respectively. To make thisconstraint work, the objective function must be augmented by the cost that representsthe inconvenience or loss of productivity caused by the lack of user-friendliness,ÿ�1F1 ÿ �2F2, where F is the unit cost of the inconvenience (or loss in productivity)from the lack of user-friendliness. F should be set to reflect its importance relative tothe systems' functionalities (e.g. the costs of underperformance). Note that Inequality(8b) is not needed if only an ERP or an integrated solution is implemented. In thelatter case, ERP functionality is usually negotiated through ERP system interfaces.Similarly, if only a set of EMPs is to be selected, Inequality (8a) may be omitted.

The model is easily implemented in Microsoft Excel or any other softwaresuitable for solving non-linear programmes. An example implementation is shown inFigure 2. In order to conserve space, interaction terms have not been included in theexample.

Figure 2 Example selection of an ERP system/EMP combination


4.3 Decision strategy

In the previous sections we have introduced a strategic level (qualitative) model andan operational level (quantitative) model to support the selection of ERP systems orEMPs. We now discuss a strategy for applying these models.

As noted earlier, the strategic model is suitable for making a general decision ofwhich type of system or mix of systems to implement given a firm's current setup.The three alternatives are:

1 to first introduce an ERP system (Internal Integration) and, possibly later on,add EMP access

2 to first use the services of one or more EMPs (External Integration) and, e.g.implement an ERP system after business has reached a certain performance or

3 to implement both an ERP system and use (a set of) EMPs (Full Integration).

Once this strategic decision has been made, it needs to be operationalised bytranslating it into the functions of the qualitative decision model. For example, thenumber of EMPs or ERP systems may be limited or interaction terms may besimplified or expanded as a result of the strategic decision.

If the firm decides to internally integrate, the quantitative model is simplifiedbecause all (parts of) functions that relate to EMPs fall away. Alternatively, if thefirm thinks of adding EMP access at a later time, this information can be reflected inthe quantitative model by discounting the expected EMP cash flows appropriatelyand estimating how the functionalities of EMPs will develop over time. Theinformation and discussion provided in the second section of this paper can be ofhelp for such a short to medium term forecast.

In contrast, if the firm decides to externally integrate, the ERP system variablesfall away, including Inequality (3) which limits the number of ERP systems. In thiscase, the firm may wish to introduce a constraint that restricts the number or EMPsto be used. Alternatively, it may first use the model without any further restrictionsto find an optimal solution and then consider an additional restriction on the numberof EMPs if the number is deemed too high.

Lastly, to explore the possibility of reducing the amount of data needed for thequantitative model, the firm may start out using rough estimates of the costs,benefits, and functionalities provided by the systems under consideration. Aftersolving the model the robustness of the solution should be investigated. If thesolution is fairly robust, more precise numbers may be needed for only a small subsetof the systems. In contrast, if the solution is sensitive to minor changes, the firm mustacquire detailed data for a larger set of the systems being investigated.

5 Conclusions and further research

This paper deals with the question of whether a firm should implement an enterpriseresource planning (ERP) system or use electronic marketplaces (EMPs) to improveits supply chain capabilities. To answer this question we investigated a variety ofimportant decision factors, including the functionalities of ERP systems and EMPs,their costs and benefits, and strategic considerations. Using these decision factors, we


then proposed two decision models to help firms in making a reasonable tradeoffbetween those two technologies.

To analyse relevant decision factors, we first investigated the historicalunderpinnings and functionalities of ERP systems, followed by those of EMPs.This analysis provided the basis for a comparison of ERP systems and EMPs interms of functionality. The comparison revealed important conceptual differencesbetween ERP systems and EMPs. First, they have evolved in different ways. WhereasERP systems and their predecessors were developed to manage the complexity ofinformation flows and decisions within a firm, the first EMPs were created after theadvent of the internet and designed to provide real-time market-making andcollaboration mechanisms. These differences are still reflected in the functionalitiesoffered by the technologies.

In addition to the functionality, the tradeoff is also impacted by more strategicdecision factors. Specifically, the introduction of ERP systems, often in conjunctionwith business process reengineering to simplify processes, results in a significantlong-term increase in internal supply chain capabilities. In contrast, using an EMPprovides access to external capabilities. As opposed to ERP systems, thesecapabilities are restricted to supply-chain functionality and almost completelyvanish when the firm discontinues its subscription to the EMP. In particular, firmswith low internal capabilities can rarely improve their supply chain efficiency byaccessing external capabilities, especially in an uncertain environment in which thetechnology or conditions for using the technology change. This is clearly the casewith EMPs, therefore making them unsuitable when the firm wants to engage inorganisational learning and building up of internal capabilities. In addition, whenoutsourcing supply chain capabilities, the firm must ensure that processes critical toits competitive position remain in-house to ensure the potential to differentiate itselffrom its competitors.

In addition to these qualitative and strategic decision factors we identified thecosts and benefits of using either technology. Our analysis revealed substantialdifferences between the two technologies in terms of both fixed and variable costs aswell as the benefits reported in the literature. As compared to EMPs, ERP systemsrequire a large up-front investment and generate relatively low maintenance costs.However, since the implementation of an ERP system often goes hand in hand withprocess reengineering [35], it substantially increases the firm's internal capabilities andefficiencies. ERP systems are also capable of managing a complex supply setup. Onthe other hand, the use of EMPs gives quick and relatively inexpensive access topotential buyers and customers, but provides little help in terms of linking a firm'sdemand to the system.

We then developed two decision models to help firms in making a decisionbetween the two information technologies. First, we developed the ERP/EMPIntegration Model which explains the transition from a state termed Island (no ERPsystem, no EMP access) to the Full Integration state (ERP system and EMP access).Possible progressions were shown and discussed in the context of the firm'scompetitive advantage and the scope versus scale of orders. The ERP/EMPIntegration Model allows a firm to arrive at a strategic decision of which (mix of)technologies to implement.

Given this strategic decision, a mixed-integer non-linear decision model was


introduced that allows the operationalisation of that decision by selecting a suitabletechnology solution. The decision model explicitly reflects quantitative decisionfactors, including the expected costs and benefits associated with introducing aselection of ERP systems or EMPs as well as the levels of supply chain functionalityneeded. The optimal solution gives concrete advice on which ERP system and EMPsto use. The model can be easily extended to also facilitate the selection of variousmodules from different ERP systems or various EMPs. In addition, a constraint may beadded that takes into account the user-friendliness of the systems under consideration.

Future research should consider three agendas. First, as the capabilities of ERPsystems and EMPs continually evolve, periodic updates of this research will be needed.Second, a formal validation of the quantitative decision model and its extensions,including a test of the model through firms currently going through this type ofdecision, is necessary and would lend additional credibility to the model. Third, giventhe changes in ERP systems and EMPs over time, it would be beneficial to extend thedecision model introduced in this paper to a dynamic, non-linear decision modelcapable of incorporating changes in costs and benefits over a planning horizon [19].

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