ERP II: Harnessing ERP Systems with Knowledge Management Capabilities

ERP II: Harnessing ERP Systems with Knowledge Management Capabilities

---

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. Knowledge management (KM) capabilities within ERP systems are clearly needed to help achieve this transformation. 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. 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.

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.

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). 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. 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. 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. 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.

Enterprise Resource Planning (ERP):

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. 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.

Enterprise Resource Planning II (ERP II):

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. 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). 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.

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. 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. 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.

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.

The Need for and Role of KM Capabilities in Enterprise Application Integration

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. Information technology is beginning to supply the information we need for business decisions. 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. 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. 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. 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.

ERP II And The Extended Enterprise Knowledge

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 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. 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. 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. Customer

requirements can be captured in knowledge maps, sales automated workflows, catalogs, and knowledge bases that are embedded in the best-of-breed tools.

Conclusion

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.