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Improvement in Operational Efficiency Due to ERP Systems Implementation: Truth or Myth?
Vijay K. Vemuri, Long Island University, USA Shailendra C. Palvia, Long Island University, USA
ERP systems are expected to provide many benefits, including improved business efficiency. However, they are also blamed for several business problems and failures. Past studies have analyzed investments in ERP systems based on net income, return on investment, new present value or change in market value of a firm. We argue that an analysis of more direct measures — intangible or tangible — would enhance confidence in the efficacy of ERP systems. We investigate the impact of ERP systems implementation on operational efficiency of medium sized firms in the pharmaceutical and chemicals industry. Our analysis of the data indicates that for a majority of the firms improvement of operational performance expected due to ERP systems did not materialize. Keywords: business effectiveness; cash management; ERP systems; inventory levels; IT investment; operational efficiency
Since 1990, the information era has exploded, witnessing many new information technology (IT) initiatives, including Y2K compliance; e-commerce; IT-enabled mega mergers of information-intensive companies such as AOL and Time Warner, WorldCom, and MCI; global outsourcing of IT and IT-enabled services; sup-
ply chain integration; and euro conversion. Many IT landmarks have been achieved during this period: more than 4 billion Web pages on the Internet; creation of software to combat cyber worms, viruses, and warfare; millions of distributed databases; and widespread utilization of data warehouses and data mining for decision support systems. To support these IT initiatives and to achieve these landmarks, IT budgets of most companies during this decade
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Information Resources Management Journal, 19(2), 18-36, April-June 2006 19
increased substantially (Seewald, 2002). There is, however, a growing criticism of escalating IT investments (Mears & Dubie, 2002) and their lack of justification (Krochmel, 1999).
ERP systems are software systems to support and to automate the business processes, providing timely and accurate enterprise-wide information for decision making. ERP systems have a long history of evolution. The production scheduling, material ordering, and product shipment systems evolved from manual reorder point systems for material procurement to computerized Materials Requirement Planning (MRP) to Manufacturing Resource Planning (MRP-II) systems that integrated MRP and capacity requirements planning to Manufacturing Execution Systems (MES) that further integrated MRP-II and shop floor and device control systems, and finally to ERP systems. Much of the streamlining of materials procurement process was achieved by MRP and MRP-II. By the late 1980s, tens of thousands of firms were using MRP-II systems (Rondeau & Litteral, 2001). The SAP R/3 modules and submodules consisting of sales and distribution, materials management, warehouse management, quality management, production planning for process industries, financial accounting, controlling, project system, and office communication were expected to reduce inventories, improve cash management, and cut down operating expenses. Kalling (2003) recently provided a theoretical framework in which resource-based views (RBV) are advanced to...