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Unit 6: Information Technology Framework

10. …………………… systems such as bar coding and electronic scanning were developed to Notes
facilitate logistics information collection and exchange.

6.6 Rationale for ERP Implementation

When firms introduced extensive computing to control and monitor operations and financials
in the early 1970s, much of the development was completed piecemeal. The financial and
accounting systems were typically introduced first, followed by some type of sales and order
management system. When additional functionality was needed, other applications were
developed or purchased. These added modules frequently used inconsistent processes, conflicting
assumptions, and redundant data. In some cases functional systems were developed internally
by the firm to fit internal work processes. The result was a series of legacy systems that
incorporated much of the firm’s history regarding processes and information but was unique in
terms of processes, capabilities, and features. Since processing and storage hardware were often
very expensive at the time these legacy systems were introduced, their developers often used
sophisticated and complex programming techniques to minimize storage and run-time
requirements.

Example: As an example, many of these legacy systems included programs with the
Year 2000 Millennium Bug (Y2K) embedded into the operating logic. By only storing two digits
of the year, less disk storage was required to store dates, thus reducing the cost of the technology.
This combination of events relating to legacy systems along with the availability of relatively
inexpensive information-storage technology caused firms to reinvest in their enterprise systems
during the 1990s. Firms were also looking to enhance their internal integration. While the
capabilities of the new technologies are certainly well beyond those of the original legacy
systems, the costs of implementation are quite substantial – exceeding millions or tens of millions
of dollars in some cases. At this point, most if not all of the Fortune 1000 firms either has
implemented or is in the process of implementing an ERP system and there is substantial
growth potential in the market for ERP systems for small and mid-level firms. Regardless of the
size of the firm, such investments are typically rationalized through three factors: consistency,
economies of scale, and integration.

6.6.1 Consistency

Many firms or divisions of firms developed legacy systems to meet their own specific
requirements and processes. This was also true for international divisions as the firm extended
markets and operations globally. Similarly, the many acquisitions and mergers that occurred
during the 1980s and 1990s brought together firms with incompatible legacy systems. The result
was many different systems that provided different and, in many cases, inconsistent processing.
One manager from consumer products multinational reported that he had to look into 15 different
computer systems to determine the sales and inventory situation for their South American
subsidiaries.

6.6.2 Economies of Scale

As firms merged and expanded globally, management made increasing demands to take
advantage of global scale economies through resource rationalization. Similarly, customers
began looking for suppliers that could provide product globally using consistent system
capabilities and interfaces to take advantage of scale economies. ERP offers firms potential
economies of scale in several ways. First, a single centralized processor or network of
decentralized processors with common configured hardware offers the potential for substantial
procurement and maintenance scale economies.

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