February 12, 2018 Should manufacturers walk away from their ERP systems?

Stock image - gray jet engine

There has been recent debate within manufacturing operations about whether firms should keep their enterprise resource planning (ERP) IT systems or ditch them in favor of stand-alone enterprise applications (SEAs) in order to minimize operational glitches. 

But should firms that have already made significant investments in ERP systems switch over to SEA systems? 

That was the question posed by Dr. M. Johnny Rungtusanatham, distinguished professor of Management Sciences at The Ohio State University Max M. Fisher College of Business, and his colleagues.

First things first: ERPs are best defined as IT systems that capture and analyze information across an entire business — think PeopleSoft; SEAs are newer, less-expensive options capable of capturing more detailed information oftentimes needed by the enterprise's individual operations, such as sales, finance and manufacturing.

Operational glitches occur when things in manufacturing don't go according to plan — late deliveries, quality problems or machines breaking down — which can result in failure to complete planned work. Because of the frequently customized nature of certain complex-manufactured products, such as special-purpose elevators and large refrigerator display cabinets found in grocery stores, operational glitches are a more common occurrence compared with other types of more-standardized manufacturing, such as automobiles. 

With work delays come lost productivity and increased costs, so it's in firms' best interest to mitigate operational glitches. But that requires a number of inputs, one of which is the correct type of IT solution to gather and aggregate information — an ERP or SEA. 

The primary appeal of ERP systems is that they provide one solution that integrates the functions needed by disparate areas of an enterprise; however, those systems are not capable of capturing the volumes of nuanced information frequently needed by a firm's different operations. 

With the rise of the cloud computing, proponents of SEA systems tout their ability to both capture the detailed information needed by firms' individual functional areas and share it with other areas of the firm via the cloud. 

Rungtusanatham and his colleagues, Dr. Antti Tenhiälä, professor of operations management at IE Business School in Madrid, Spain, and Dr. Jason W. Miller, assistant professor of logistics at Michigan State University's Eli Broad College of Business, surveyed representatives from 163 European manufacturing firms about how they typically react to operational glitches.

"The basic question we were trying to answer through this research is, 'What type of information systems strategy — ERP or SEA — should firms pursue when operational glitches are frequent?'" Rungtusanatham said. 

"The answer is that both ERP and SEA solutions are viable, but it depends on the extent to which different functions are highly dependent on one another when it comes to work being passed from one functional area to another. The answer really depends on the nature of the interdependencies between organizational functions."

The researchers analyzed supply chains across seven different industries. In addition to special-purpose elevators and grocery-store refrigerators, the researchers examined manufacturers of air-defense artillery; aeroderivative power turbines, such as jet engines; factory automation; industrial cranes; and reactive power conversion systems used in electrical power generation. In addition to manufacturing complex, high-tech equipment, the firms typically design their products to specific customer requirements. 

ERP systems were intended to replace old legacy systems, some of which were as basic as employees using spreadsheets and rudimentary databases to manage information. They were designed to allow for a single point of data capture and a wide diffusion of information throughout the enterprise. 

"The discontent is that the amount of money that has gone into these ERP systems hasn't really resulted in the intended payback," Rungtusanatham said. "The limitation of ERP systems is their architecture. It often does not allow you to capture specialized knowledge about a work function that may be more efficiently handled by stand-alone enterprise applications."

For operations that don't have frequent operational glitches, ERP systems are a viable solution, Rungtusanatham said. 

"When the connections between various functions are very tight, meaning two functions that likely have a very large overlap of information that both sides need, ERP systems can be very efficient." 

Rungtusanatham said that he and his colleagues hope their findings will help manufacturing companies avoid switching from ERP systems when it may not be in their best interest to do so. 

"What was surprising in the study is that there's no universal solution," he said. "For those firms with high interdependencies, where there's some set of information shared across functions, ERP systems should remain a very helpful platform."

M. Johnny Rungtusanatham Management Sciences
Faculty Profile