Performance effects of using an ERP system for manufacturing planning and control under dynamic market requirements

• Date: 01 May 2015
• Published date: 01 May 2015
• Author: Pekka Helkiö,Antti Tenhiälä
• DOI: http://doi.org/10.1016/j.jom.2014.05.001

Journal of Operations Management 36 (2015) 147–164

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Performance effects of using an ERP system for manufacturing

planning and control under dynamic market requirements

Antti Tenhiäläa,∗, Pekka Helkiö b,1

aIE Business School, Calle de María de Molina 12-5, 28006 Madrid, Spain

bAalto University, Department of Industrial Engineering and Management, Otaniementie 17, 02150 Espoo, Finland

article info

Article history:

Received 19 October 2012

Received in revised form 8 May 2014

Accepted 13 May 2014

Available online 21 May 2014

Accepted by Daniel R Guide

Keywords:

Decision support systems

Production scheduling

Shop-floor control

Materials management

Strong inference

Dynamic capabilities

abstract

Enterprise resource planning (ERP) systems have a controversial reputation. Critics say that even if ERP

systems may be beneficial for organizations operating in stable conditions, they are surely detrimental

to organizations that face dynamic market requirements. This is because ERP systems are said to impose

such procedures and constraints on organizations that make business processes inflexible to change.

In contrast, proponents argue that the information-processing capabilities of ERP systems are crucial

for organizations that face dynamic market requirements and also that the criticized procedures and

constraints actually support process reengineering. These two contradictory arguments are often found

in practitioner literature, but both of them can also be supported by management theory. The central

tenets of the Organic Theory of organization design imply that ERP systems should be detrimental when

market requirements change frequently, whereas the principles of Rigid Flexibility Theory suggest that

they should be advantageous. In this study, we use cross-sectional data from 151 manufacturing plants

to determine which argument is more applicable in the context of manufacturing planning and control.

The results strongly favor the use of ERP systems under dynamic market requirements. To facilitate the

reconciliation of the two contradictory arguments, we discuss how the results may have been influenced

by two contextual factors: the predominantly technical nature of the studied organizational system and

the tight interdependence of the studied activities.

© 2014 Elsevier B.V. All rights reserved.

1. Introduction

Enterprise resource planning (ERP) systems attracted consider-

able attention in the business world at the turn of the millennium.

Despite the sizable investments involved, these software packages

were a breakthrough, especially in developed countries where they

were installed by a vast majority of manufacturing firms (Olhager

and Selldin, 2003; Jutras, 2010). After the initial excitement, how-

ever, an increasing number of managers have started to complain

about the shortcomings of these systems. The main critique is that

ERP systems impede making changes to business processes, which

is a major problem in dynamic business environments where mar-

ket requirements change rapidly (Rettig, 2007; Lindley et al., 2008;

Goodhue et al., 2009; Ganly and Montgomery, 2012; Fauscette,

∗Corresponding author. Tel.: +34 91 568 9600.

E-mail addresses: antti.tenhiala@ie.edu (A. Tenhiälä), pekka.helkio@aalto.fi

(P. Helkiö).

1Tel.: +358 9 47001.

2013; IDG Market Pulse, 2013). Frustrated with the inflexibility

of ERP systems, many managers have sought help from in-house

developed software or traditional functionally specialized busi-

ness applications (Upton and Staats, 2008; Deloitte, 2010; Prouty

and Castellina, 2011; Ganly and Montgomery, 2012). Often, if the

managers have not taken the initiative to replace the ERP system,

their subordinates have begun to circumvent its use (Bendoly and

Cotteleer, 2008; Xue et al., 2011; Christiansen et al., 2012).

Advocates of ERP systems abhor the implementation of stan-

dalone software as much as the circumvention tactics and claim

that ERP systems can and should be always reconfigured when

organizations change their business processes to serve new mar-

ket requirements (Gattiker et al., 2005; Goodhue et al., 2009;

Drobik and Rayner, 2011). They argue that the use of standalone

tools or handcrafted spreadsheets compromises the main advan-

tage of ERP systems, namely, the cross-functional integration that

enables swift and reliable information flows across the organiza-

tion (Berente and Yoo, 2012; Michael et al., 2012). The proponents

of ERP systems do not perceive the alleged inflexibility as an obsta-

cle but instead argue that the kind of rigidity that is inherent to ERP

http://dx.doi.org/10.1016/j.jom.2014.05.001

0272-6963/© 2014 Elsevier B.V. All rights reserved.

148 A. Tenhiälä, P. Helkiö / Journal of Operations Management 36 (2015) 147–164

systems actually supports process reengineering and is therefore

beneficial for organizations facing dynamic market requirements

(Gattiker et al., 2005; Scott, 2011).

Management theory helps understand the controversy among

practitioners over whether ERP systems facilitate or impede adap-

tation to changing market requirements. We use Teece’s (2007)

framework of dynamic capabilities to analyze the existing research

and find out that ERP systems indeed have characteristics that

both help and hinder organizational responses to dynamic mar-

ket requirements. We then show that the conflicting arguments

about the effects of ERP systems represent two different theo-

retical views on organizational adaptability. The argument that

organizations facing dynamic market requirements must decen-

tralize their management structures and rid themselves of the rules

and standardized processes of ERP systems can be based on the

Organic Theory of organization design (Burns and Stalker, 1961).

The argument that these organizations benefit from the simplic-

ity and discipline enforced by ERP systems can be based on Rigid

Flexibility Theory (Collins and Schmenner, 1993). Although Organic

Theory was first proposed over half a century ago, it has been widely

used in the contemporary operations management research (e.g.,

Huang et al., 2010; Goodale et al., 2011; Zhang et al., 2012). Rigid

Flexibility Theory is newer and less cited, but it too has received

support in operations management research (Collins et al., 1998; da

Silveira, 2006). Due to the theoretical backing for both perspectives,

the dispute on whether ERP systems are beneficial or detrimental

under dynamic market requirements cannot be settled via theoret-

ical reasoning alone.

To address the question empirically, we analyze data from 151

manufacturing plants in 12 industry sectors, focusing specifically

on the performance of manufacturing planning and control activities

under varying levels of dynamism in market requirements. We use

Platt’s (1964) method of strong inference to test which of the two

contradictory views is better supported in this empirical context.

Finally, we discuss the theoretical generalizability of our findings

by exploring the boundary conditions that may have influenced the

results (Dubin, 1978).

2. Literature review

To position the present study within the existing literature, we

next discuss ERP systems’ status in today’s enterprise software

landscape and then explore the question of how ERP systems may

help or hinder operational performance when organizations face

dynamic market requirements.

2.1. ERP systems in the enterprise software landscape of the 2010s

ERP systems are modular software packages that integrate a

firm’s business functions around a common database and stan-

dardized processes that are configured to fit the needs of the user

organizations (e.g., Boudreau and Robey, 2005; Ranganathan and

Brown, 2006; Sasidharan et al., 2012). Substantial research efforts

have been directed to this special category of enterprise software.

The notorious failures of some of the early implementations (see

examples in, e.g., Robey et al., 2002) gave rise to much research

on the typical pitfalls and success factors of implementing ERP sys-

tems (for reviews and recent examples, see, e.g., Karimi et al., 2007;

Seddon et al., 2010; Berente and Yoo, 2012; Sasidharan et al., 2012;

Yeh and Xu, 2013). The variability in the outcomes of the imple-

mentations also motivated broad research on ERP systems’ overall

performance effects (e.g., Gattiker and Goodhue, 2005; Harris and

Davenport, 2006; Ranganathan and Brown, 2006; Hendricks et al.,

2007) and end users’ assimilation of the implemented systems (e.g.,

Boudreau and Robey, 2005; Bendoly and Cotteleer, 2008; Saeed

et al., 2010; Xue et al., 2011). A recurring finding in these stud-

ies has been that despite many successful examples (e.g., Cotteleer

and Bendoly, 2006), the average overall performance effect of ERP

systems has been fairly neutral (Bendoly et al., 2009), and that the

variability in the effects cannot be fully explained with the imple-

mentation characteristics or the quality of use (Seddon et al., 2010).

In response, the broad main streams of ERP system research have

recently been complemented by studies that focus on specific con-

texts(e.g., Sarker et al., 2012; Lai et al., 2013) or pay special attention

to ERP systems’ fitness to external contingencies (e.g., Berente and

Yoo, 2012; Sasidharan et al., 2012). This study extends both of these

emerging trends.

Over time, the studies on ERP systems have also started to cover

more specialized tools, such as customer relationship management,

manufacturing planning, advanced production scheduling, supply

chain management, and sourcing software (Hendricks et al., 2007;

Sia and Soh, 2007; Stratman, 2007; Bendoly et al., 2008; Rai and

Hornyak, 2013). This trend has been motivated by practical con-

siderations, as firms have increasingly implemented standalone

software (Deloitte, 2010; Fauscette, 2013). Although most firms do

not have plans to completely abandon their ERP systems, many

have implemented standalone tools to replace some functional-

ity of their ERP systems (Ganly and Montgomery, 2012). Market

research corroborates this trend by showing that the adoption rates

of ERP system modules other than for financials and customer order

handling have dropped considerably (Wailgum, 2008; Panorama

Consulting, 2011) from the heyday of ERP systems in the early

2000s (Olhager and Selldin, 2003). Standalone tools are imple-

mented especially in business functions where fitness to a firm’s

processes is critical, a good example being manufacturing planning

and control (Brandl, 2011).

The trend in the increased use of standalone tools is interesting

because it can be argued to compromise ERP systems’ key value

offering: swift and reliable intra-organizational information flows

(e.g., Michael et al., 2012). Whenever some information is managed

outside the database of the ERP system, the integrity and currency

of the information are put in jeopardy, regardless of whether rudi-

mentary spreadsheets or sophisticated business applications are

used (Berente and Yoo, 2012). The trend is also interesting because

research has shown that wider functional scope would be asso-

ciated with greater benefits from ERP systems (Ranganathan and

Brown, 2006; Karimi et al., 2007). These contradictions motivate

studying the question of whether replacing ERP system function-

ality with other tools is good or bad for operational performance.

2.2. Dynamic capabilities perspective on ERP systems

Because ERP systems’ inflexibility is the most often cited

reason why managers consider replacing them with other solu-

tions (Upton and Staats, 2008; Goodhue et al., 2009; Ganly and

Montgomery, 2012), this study explores whether the dynamism of

the operating environment influences the performance effects of

ERP systems. In the management literature, dynamism tradition-

ally refers to the rate of change in those aspects of an organization’s

environment that are not directly under its own control (Miller

and Friesen, 1983). We focus on the rate of change in market

requirements because it constitutes a great organizational chal-

lenge regardless of whether an ERP system or other software is

used (Goodhue et al., 2009), as well as because research indicates

that appropriate software is crucial to ensure “that firms can

rapidly redesign existing processes and create new processes

for exploiting dynamic marketplace conditions” (Sambamurthy

et al., 2003, p. 245). This ability has been discussed as “market

capitalizing agility” in the information systems literature (Lu and

Ramamurthy, 2011) and under the rubric of “dynamic capabilities”

in the management literature (Teece et al., 1997), yet it is not clear