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OPERATIONS STRATEGY AND IMPLEMENTING ICTS: THE RECIPE FOR SUCCESS
INCOM'2006: 12th IFAC/IFIP/IFORS/IEEE/IMS Symposium Information Control Problems in Manufacturing May 17-19 2006, Saint-Etienne, France
OPERATIONS STRATEGY AND IMPLEMENTING ICTS: THE RECIPE FOR SUCCESS Lawrence M. Corbett Victoria Management School, Victoria University of Wellington, PO Box 600, Wellington, New Zealand
Abstract: This paper considers the role of investments in ICTs in the operations strategies of firms. It discusses the nature of ICTs, their proposed benefits, and the lessons of successful implementation from a case study investigation. It finds that deep process and business knowledge by managers, user involvement in implementation, careful vendor selection, careful implementation partner selection, and superior human capital resources are key requirements for the firm to gain the benefits desired. Copyright © IFAC 2006 Keywords: manufacturing processes, management systems, operating systems.
information
1. INTRODUCTION
technology,
implementation,
2. THEORETICAL DEVELOPMENT
Information and Communication Technologies (ICTs) are becoming increasingly ubiquitous in society. Their increasing ubiquity in specific firms, industries and countries has been strongly anecdotally (and to a lesser but still significant extent in certain parts of the academic literature) associated with these firms, industries and countries reaping greater benefit from their ongoing investments in ICTs and more widespread use of technologies such as the Internet than those which have not pursued ICT investments and utilisation with such vigour (OECD, 2002: 13).
2.1 Definition of ICTs Information and communication technologies (ICTs) are typically defined as any technologies used to “store, receive, transmit, and algorithmically transform any type of information that can be digitised – numbers, text, video, music, speech, programs, and engineering drawings, to name but a few” (Brynjolfsson and Hitt, 2002: 2). Currently, the term ‘ICT’ generally refers to electronic information processing technologies such as computers and the Internet. Information has always been a fundamental component of the co-ordination of production and exchange, and the costs of acquiring and processing information has been a constraint on the quantity, types and efficiency of activities undertaken (Arrow, 1999). However, changes in technology have enabled activities to be undertaken with information that were not possible or cost-effective previously. “The real information revolution is not that information is suddenly becoming important. Information has always been important. The revolutionary aspect of the information age is the treatment of information in ways that would have been unimaginable only a few decades ago”
The presumption that ICT investment leads directly to greater levels of benefit accrual by the investing entities has thus spurred the development of a plethora of national and international Information Economy policies designed to encourage firm and industry investment in ICTs. This paper looks at the investment in an ERP system by a New Zealand manufacturer. It considers the role of this investment in relation to the firm’s operations strategy and its sources of competitive advantage.
679
(Perelman, 1998).
transformation efforts (Stonebraker and Leong, 1994). In the field of operations strategy the resource commitment decisions are generally categorized as those around the elements of capacity, facilities, process technology, sourcing, workforce, quality, work planning and organisation structure (Hayes and Wheelwright, 1984). There is a growing competitive importance for using ICTs successfully in operations because of the pressures arising from increasingly shorter product life cycles, the demand for more customized products, services or solutions, the need for quick response by producers, and the distributed nature of the operations of some organisations. For operations managers, this means there is more information to be managed and greater advantage to those that do it well. ICTs have also become more central to the operations function within organisations because of the increasing decentralization of Information Technology (IT). Distributed architectures, networking and open standards permit more local control, configurations and innovation. More and more responsibility is being placed on operations managers to manage ICTs and this entails a new skill set for traditionally trained managers. In small businesses, the operations manager may well also be the ownermanager. This is important because it allows those people charged with building operations advantage and distinctive competence to have access to information and tools with fewer intermediaries (Upton, 1995). ICTs in operations can operate at various levels from the most straightforward, the process level (what lot is run next? Is the process under control?), to the most complex, the industry/network level (is there a supplier that can make this?). ICTs in operations also have a competitive role or purpose, namely. to reinforce an existing “order winner” or to change the way the operation competes. A change in the competitive advantage the operation aims to deliver will certainly mean a reexamination of other elements of the operations strategy (Upton, 1995).
2.2 Complementarities in manufacturing Historically, “most of our economic institutions and intuitions emerged in an era of relatively high communication costs, limited computational capability and related constraints” (Brynjolfsson and Hitt, 2002: 3). Thus, the emergence of new technologies, such as computers and the Internet, that have the power to reduce the costs of co-ordination, communications and information processing can be expected to have some fundamental and far-reaching effects upon organisational and institutional form. This effect is in addition to the use of new technologies to create new products and new markets for these new products (Howell et al, 2004). Whilst there is some contention about the extent to which ICTs have contributed to economic growth at the macroeconomic level (see, for example, Gordon, 2000, Triplett, 1998), at the firm level, there is a substantial and growing body of evidence linking ICTs with both higher productivity and organisational transformation (see, for example, Brynjolfsson and Yang, 1996; Bresnahan, Brynjolfsson and Hitt, 2000). Brynjolfsson and Hitt (2002: 4) argue that firstly a significant component of the value of ICTs is related to the ability of computers to enable complementary organisational investments such as business and work practices; and secondly, these investments lead to productivity increases by reducing costs and enabling firms to increase output quality in the form of new products or improvements in intangible aspects of existing products such as convenience, timeliness, quality an variety (Howell et al, 2004). Milgrom and Roberts (1990, 1991) introduced the notion of complementarities, using the example of the falling cost of high speed data communication, data processing, and flexible multitask equipment. They argue that investment in these technologies lead to “increases in the directly affected activities, which through a web of complementarities then lead to increases in a set of related activities as well” (1991:84)
At what level does the technology operate?
Reinforce existing competitive focus
Change Competitive role of the Operation
Network/Industry Level
2.3 Operations strategies and ICTs
Business Level
Operations managers are responsible for producing the supply of goods and services in organisations, thus they make decisions regarding the operations functions and the transformation systems used. The operations strategy of a firm is the what and how of activities directed towards distinctive operations competence that evaluate potential impacts of situations and alternatives in structured time dimensions, and integrate a pattern of decisions to balance the resource commitments, output requirements, and risks in various focused
Shop/Factory Level
Process Level What is its competitive objective?
Figure 1. Level and purpose of ICTs
680
The figure above combines these dimensions of level and purpose into one framework (Upton, 1995)
A major strength of Gallagher has always been its extensive overseas distribution network. Distributors have sometimes been set up under existing agency companies, but most often companies have been set up under local control with a minority Gallagher shareholding. The company has retained almost all of its international distributors since it began exporting in 1967. Gallagher also prefers to deal with small family owned businesses where there is continuity of management and where loyalty and trust develop through several generations. Many of the distributors in Japan, Holland and the UK are second-generation family businesses.
3. CASE STUDY This case describes the implementation of the SAP R/3 software system at Gallagher Group Ltd, one of New Zealand’s leading manufacturers and exporters. The decision was initiated by the inability of their existing software to cope with developments in the business, such as faster response times and more make-to-order, and by the need to integrate the increasingly complex and far-flung organisation that Gallagher was becoming with subsidiaries in New Zealand and overseas.
3.2 Operations strategy and ICT investment The company manufactures its final products in New Zealand. It operates with a flexible skilled workforce with a salary only pay system. While it no longer believes its manufacturing operation is a primary source of competitive advantage (because of the impact of Chinese manufacturers and low price competition), it now sees manufacturing as an integral part of its supply chain, as service, distribution, leading-edge technology, product range and reputation are key competitive advantages. Gallagher has about 2000 SKUs, and there could be up to 200 SKUs in one electric fence installation: from porcelain insulators, to wire, to electronic circuit boards.
3.1 Company background Gallagher is a privately-owned and family-run manufacturer of movement control products, i.e. electric fences, security fences, access control systems. There are about 450 employees, including highly skilled toolmakers and engineers as well as multi-skilled shop floor assembly workers. The Gallagher Group’s products are now sold over 120 countries; it sells directly to 65 countries and has subsidiary companies in 14. About 80 percent of production is exported. Bill Gallagher (CEO) says the company’s exporting success is due to having the right partners and distributors round the world and being the most exciting and profitable product on the market. Gallagher’s creation of a leading position in mains-powered electric fencing across European markets in the late 1970s was the outcome of: the early development of this technology in government science laboratories in New Zealand; the early threat of a local competitor establishing a lead in the new technology; Gallagher’s own long-standing experience, reputation, and marketing networks in battery-powered electric fencing in the New Zealand market; and the passage of leadership to the next generation of the family, open to new distribution strategies that quickly established a network of independent dealers for Gallagher systems across Europe ahead of a Danish competitor who was slower to extend its market reach. In the transition from a small, New Zealand-focused manufacturer of a broad range of agricultural equipment into a position of global leadership in the tightly-focused product line of electric fencing systems, Gallagher thus used established resource-based advantages in local-market expertise and reputation as points of leverage to create new resource-based advantages of innovation, and networks of relational assets, around a radically-changed strategy of product focus and global scope, that radically redefined the firm’s relationship to its environment (Brocklesby et al, 2001).
In 1988 the company somewhat reluctantly decided to install the Manufacturing Resource Planning II (MRPII) computer management system as it faced worsening inventory turnover performance. At the time it was the biggest single investment ever made by Gallagher, but it paid for itself in its first year through inventory reduction alone. MRPII exposed areas where jobs were not being done properly. The smokescreens of the past were gone. By necessity, all departments were forced to operate as a team under MRPII. In 1999 the Gallagher Group again upgraded its computer based manufacturing management systems. It replaced the MRPII network with a $2 million investment in an enterprise resource planning (ERP) system and chose the SAP R/3 product. SAP AG is a German company and is the largest supplier of ERP systems worldwide, with more than 32000 companies running SAP in 2005. The SAP R/3 system integrates, among other processes, sales, operations and shop floor planning processes across the entire company, including subsidiaries. It is more comprehensive than MRP and is constantly updated through research and development. There were several key drivers for the investment in the ERP system and most notably the desire for integration across all operating units and regions in the total Gallagher business. In addition, Gallagher has reduced its supplier base from 400 to about 150 over
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recent years and for many items it has single source supply. This development is based on their desire for closer partnerships with their suppliers by giving fewer of them larger orders.
processes and is often a cause of poor or over budget implementation. Tucker estimates that only about $2000 would have been spent on customisation. Gallagher does not have a large corporate structure. The IT technical staff report to the senior executive in charge of R&D. What Gallagher have developed is a team of six people who have become very skilled in the R/3 product and have a skill set that is probably higher than that of the consultants used on the implementation. This group is now doing all the configuration work in-house. It is also doing all the work to bring the subsidiary company operations in the USA and UK onto the ERP network. Tucker estimates that spending on outside consultants to work on the ERP system is minimal and less than $10000 per annum.
Gallagher were unsure of how sophisticated a system would suit them best as, on a world scale, they are a small business, and they “were a bit nervous about picking one of the top systems”. In order to compare and contrast the available product offerings, they formed a project team of key users, that is, people from all the business units and functions that were likely to be users of such a system. They scanned the available suppliers and invited six of them to make presentations on how their systems would deal with what Gallagher perceived as its areas of weakness, such as inventory management and forecasting. They chose a mixture of what they called “tier 1” and “tier 2” systems. The former were the firms with largest market share such as SAP, Oracle etc. and the most powerful products, and the latter were vendors with products that were perceived as being able to do the job but with lower level of potential functionality. After these presentations, Gallagher produced a short list of three and went back to each of them with far more detailed scenarios of idealised business processes.
Gallagher’s investment in the SAP R/3 software is an example of an improvement-driven IT decision where they decided what they wanted the system to do and then proceeded to acquire it. Steve Tucker believes that the investment has produced some tangible results. The company is now, or soon will be, completely on one system so all information will be visible to all parts of the Gallagher Group. The company is now bigger than it was when the decision to purchase was made and yet there has been little increase in overhead. Tucker believes part of the reason is the investment in R/3.
As a result of this process, the project team felt SAP R/3 would deliver significantly more than the other products. They felt comfortable with choosing a tier one vendor even though by SAP’s standards they were a small business. They were also more comfortable with the ability of R/3 to handle the requirements of a new customer that wanted to deal differently with Gallagher than existing customers. Finally, SAP offered a highly attractive price to the firm, as they were aggressively seeking market share among companies of similar size to Gallagher.
Gallagher has been working on process improvement continually over many years and, as mentioned above, had found it reached a point where the old system could not cope with the demands of the new business processes. Tucker believes some companies do not go far enough in improving their existing processes before introducing new IT and this is often a cause of disappointment with the results. Since implementation of SAP R/3, Gallagher have achieved an improvement in many key operational measures, e.g. in DIFOTIS (delivery in full on time in specification) they are now operating at high 90s percent for New Zealand customers and mid 90s percent for overseas customers.
Once Gallagher’s board approved the purchase of the R/3 platform, the project team, headed by Mr Steve Tucker (Operations manager), sought out an implementation partner as SAP do not carry out this phase themselves. The two options were either to go with one of the Big Six accounting firms that have consultancy arms specialising in ERP implementations, or choose a partner with more experience working with companies the size of Gallagher. The team felt nervous of using one of the Big Six as their approach involved greater division of tasks and Gallagher felt somewhat uncomfortable with this. Gallagher chose a smaller firm, Supply Chain Consulting, whose approach to implementation was much more of a partnership format.
In the three years since the system was put in, Gallagher has changed significantly. Its sales have grown, it has new fully-owned subsidiaries, it has more offshore subsidiaries, and it has entered the security access control business. Tucker explains that this has all been done with a similar level of overhead, management and control structure, and firmly believes that they could not handle the business transactions they now do without the investment in R/3. Gallagher feels that Government, in promoting the idea of the Information Economy in New Zealand, does not fully appreciate the high financial and business risks from ICT investment such as they have made. Over recent years, the company has been investing about $1-1.5 million per year in new
The implementation took about nine months and went live in June 2000. One notable feature was that they avoided the need for a high degree of customisation of the software. This occurs where the software has to be changed to suit Gallagher’s
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manufacturing technology such as a new surface mount machine in the electronics factory and a new 650 tonne injection moulding machine in the plastics factory. These are tangible pieces of equipment that have a very high probability of being delivered and working as they are supposed to work. By contrast the investment in SAP R/3 was an additional $2 million in one year on something that has a much lower probability of working as it is supposed to work and deliver the results, and is much less tangible. Gallagher sees such investment as highrisk projects, not only because of the financial implications but also because they are critical to the long-term growth of the company thereafter, if they do not work out as hoped.
business in new ways and because the platform that they were running on could not really keep pace with these changes, e.g. wanting to make more product on a make to order basis rather than a make for stock basis, and wanting to forecast at a certain level and line up the raw materials but not make the final products until the order came in. There is, thus, no substitute for business managers and decisionmakers knowing their own business and industry, and how business models are changing, as this enables them to select, customise and prioritise the development. There is also no substitute for having knowledgeable and experienced staff participating in the development and implementation of ICT applications, and an organisational commitment to ongoing training and learning in both ICT and other organisational systems.
In terms of human capabilities, Gallagher has developed its people in the SAP R/3 software environment as mentioned above. They have users at all levels in the organisation so there has been a widespread upgrading of staff computer skills as a result. The company has not had problems recruiting technical staff. Tucker believes there are plenty of “technically savvy people being pumped out of universities” but what is lacking in these people is their having knowledge of how businesses run, how to use process improvement tools, and understanding how to manage change in businesses. Gallagher is confident that this investment in ICT has resulted in increased productivity and economic benefit, especially in terms of inventory management, and service to customers. The business is now more complex in terms of the numbers of transactions taking place than it was three years ago when the investment was made, and the system has been able to handle the growth and changes quite comfortably. Gallagher now has an in-house team that has become highly skilled in software improvement, and has little use for outside consultants. Staff at all levels interact with the software and have input into improving its operation.
Successful implementation and use of ICTs is contingent upon the extent to which managers and decision-makers first know and understand the characteristics of their product, business, industry and trading environment. If managers and decisionmakers understand their individual ‘value chain’, then they will be clear about the ways in which they derive value from their businesses, how information contributes to this process, and therefore have a much clearer understanding of both where the ICTs will fit in their individual value chain, and the extent to which they can add to the value created. This positions them to be better able to manage the costs, risks and opportunities that they face in their businesses. When this degree of clarity is present, then it is much more likely that the firm has both a clear strategy to guide its decisions and operations, and a fuller understanding of the ways in which any technology fits into the value-creating process. Thus, the technology purchase and implementation becomes an integral part of the firm’s strategy, whether it is the use of a technology to gain a competitive advantage or investment being undertaken merely to “keep up with the state of play in the industry” (Howell et al, 2004).
Management at Gallagher sees their path as being improvement-driven IT and so cannot identify the ICT as being a direct cause of business improvement as they are continually working on their processes. They see the ERP system as an enabler and feel they would not be where they are today without having made the investment. On the other hand, they have also found that the functionality of the software has instigated some IT-driven improvements in some processes. The full functionality of the Advanced Planner and Optimiser (APO) module has not yet been fully exploited, however, as Gallagher have preferred to concentrate on what is available within the core R/3 product to date.
Firms with this level of understanding will be better placed to implement ANY new technology successfully. The technology purchase is much more likely to be based upon a well-reasoned analysis, and implementation planned and prioritised in such a way that the most valuable or the most fundamental components are installed first. Thus, success is more likely. Notably, well-reasoned analysis also reduces the probability of a firm investing in a technology merely because it exists or because it has been implemented elsewhere. Many writers have discussed the perils of automating a poor process (e.g Upton, 1995) Knowledge of specific firm and industry characteristics will mean that reasoned abstention from specific purchases can be a
4. CONCLUSIONS The investment in the ERP system at Gallagher it was stimulated by wanting the ability to run their
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Milgrom, P., and J. Roberts (1990). The Economics of Modern Manufacturing; Technology, Strategy and Organization, The American Economic Review, 80, 511-528. Milgrom, P., Y. Qian, and J. Roberts, (1991), Complementarities, Momentum, and the Evolution of Modern Manufacturing, The American Economic Review, 81, 84-88. OECD, (2003) ICT and Economic Growth: Evidence from OECD Countries, Industries and Firms. OECD Paris. http://www.oecd.org. Perelman, M. (1998). Class Warfare in the Information Age. St Martin’s Press, New York. Stonebraker, P W. and G. K Leong. (1994), Operations Strategy: Focusing competitive excellence, Allyn and Bacon. Boston Triplett, J E. (1998). The Solow Productivity Paradox: What do Computers do to Productivity? Brookings Institution. http://www.brookings.org. Upton, D M. (1995). Designing, Managing and Improving Operations, New York Prentice Hall. Zachman, J. A., (1987), A Framework for Information Systems Architecture, IBM Systems Journal, 26, 276-292.
profitable strategy in some circumstances. Knowing what these circumstances are is critical. To summarise the key steps in this successful implementation would be: senior managers have deep process and business knowledge, the firm has a strong improvement focus, a clear and agreed understanding of what is the desired outcome, careful vendor selection, careful implementation partner selection, user involvement in the process, development of human capabilities within the firm (so avoiding the need for on-going external assistance). This implementation process would seem to fall in line with that proposed by Zachman (1987), where it is organised around the points of view taken by the various players. The people at Gallagher, however, did not know of this framework but appear to have stumbled on it anyway. REFERENCES Arrow, K. J. (1999). Information and the organisation of industry. In: Markets, Information and Uncertainty: Essays in Economic Theory in Honour of Kenneth J. Arrow. (Chichilnisky, G. (Ed.)) Ch. 1. Cambridge University Press. Cambridge UK. Bresnahan, T. F, E. Brynjolfsson, and L. M. Hitt. (2002). Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence. Quarterly Journal of Economics.117, 339-376. Brocklesby, J., C. Campbell-Hunt, and L.M. Corbett (2001). Evolving order: Organisations as Cognitive Systems, European Group for Organisation Studies, Lyon, July Brynjolfsson, E. and L. M. Hitt. (2002). Beyond Computation: Information Technology, Organizational Transformation and Business Performance. Keynote address given at the North American Productivity Workshop, Schenectady, New York; June 21. . Brynjolfsson, E. and S. Yang. (1996). Information Technology and Productivity: a Review of the Literature. Advances in Computers 43, 179-214. Gordon, R J. (2000). Does the ‘New Economy’ Measure Up to the Great Inventions of the Past? National Bureau of Economic Research Working Paper 7833. http://www.nber.org/papers/w7833. Hayes, R H. and S C Wheelwright, (1984) Restoring our competitive edge: competing through manufacturing. Wiley, New York Howell, B., L.M. Corbett, V. Mishra, and L. Ryan, (2004). Information and Communication Technologies in New Zealand, A Report for the Ministry of Economic Development, Victoria Management School, Wellington.
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OPERATIONS STRATEGY AND IMPLEMENTING ICTS: THE RECIPE FOR SUCCESS Lawrence M. Corbett Victoria Management School, Victoria University of Wellington, PO Box 600, Wellington, New Zealand
Abstract: This paper considers the role of investments in ICTs in the operations strategies of firms. It discusses the nature of ICTs, their proposed benefits, and the lessons of successful implementation from a case study investigation. It finds that deep process and business knowledge by managers, user involvement in implementation, careful vendor selection, careful implementation partner selection, and superior human capital resources are key requirements for the firm to gain the benefits desired. Copyright © IFAC 2006 Keywords: manufacturing processes, management systems, operating systems.
information
1. INTRODUCTION
technology,
implementation,
2. THEORETICAL DEVELOPMENT
Information and Communication Technologies (ICTs) are becoming increasingly ubiquitous in society. Their increasing ubiquity in specific firms, industries and countries has been strongly anecdotally (and to a lesser but still significant extent in certain parts of the academic literature) associated with these firms, industries and countries reaping greater benefit from their ongoing investments in ICTs and more widespread use of technologies such as the Internet than those which have not pursued ICT investments and utilisation with such vigour (OECD, 2002: 13).
2.1 Definition of ICTs Information and communication technologies (ICTs) are typically defined as any technologies used to “store, receive, transmit, and algorithmically transform any type of information that can be digitised – numbers, text, video, music, speech, programs, and engineering drawings, to name but a few” (Brynjolfsson and Hitt, 2002: 2). Currently, the term ‘ICT’ generally refers to electronic information processing technologies such as computers and the Internet. Information has always been a fundamental component of the co-ordination of production and exchange, and the costs of acquiring and processing information has been a constraint on the quantity, types and efficiency of activities undertaken (Arrow, 1999). However, changes in technology have enabled activities to be undertaken with information that were not possible or cost-effective previously. “The real information revolution is not that information is suddenly becoming important. Information has always been important. The revolutionary aspect of the information age is the treatment of information in ways that would have been unimaginable only a few decades ago”
The presumption that ICT investment leads directly to greater levels of benefit accrual by the investing entities has thus spurred the development of a plethora of national and international Information Economy policies designed to encourage firm and industry investment in ICTs. This paper looks at the investment in an ERP system by a New Zealand manufacturer. It considers the role of this investment in relation to the firm’s operations strategy and its sources of competitive advantage.
679
(Perelman, 1998).
transformation efforts (Stonebraker and Leong, 1994). In the field of operations strategy the resource commitment decisions are generally categorized as those around the elements of capacity, facilities, process technology, sourcing, workforce, quality, work planning and organisation structure (Hayes and Wheelwright, 1984). There is a growing competitive importance for using ICTs successfully in operations because of the pressures arising from increasingly shorter product life cycles, the demand for more customized products, services or solutions, the need for quick response by producers, and the distributed nature of the operations of some organisations. For operations managers, this means there is more information to be managed and greater advantage to those that do it well. ICTs have also become more central to the operations function within organisations because of the increasing decentralization of Information Technology (IT). Distributed architectures, networking and open standards permit more local control, configurations and innovation. More and more responsibility is being placed on operations managers to manage ICTs and this entails a new skill set for traditionally trained managers. In small businesses, the operations manager may well also be the ownermanager. This is important because it allows those people charged with building operations advantage and distinctive competence to have access to information and tools with fewer intermediaries (Upton, 1995). ICTs in operations can operate at various levels from the most straightforward, the process level (what lot is run next? Is the process under control?), to the most complex, the industry/network level (is there a supplier that can make this?). ICTs in operations also have a competitive role or purpose, namely. to reinforce an existing “order winner” or to change the way the operation competes. A change in the competitive advantage the operation aims to deliver will certainly mean a reexamination of other elements of the operations strategy (Upton, 1995).
2.2 Complementarities in manufacturing Historically, “most of our economic institutions and intuitions emerged in an era of relatively high communication costs, limited computational capability and related constraints” (Brynjolfsson and Hitt, 2002: 3). Thus, the emergence of new technologies, such as computers and the Internet, that have the power to reduce the costs of co-ordination, communications and information processing can be expected to have some fundamental and far-reaching effects upon organisational and institutional form. This effect is in addition to the use of new technologies to create new products and new markets for these new products (Howell et al, 2004). Whilst there is some contention about the extent to which ICTs have contributed to economic growth at the macroeconomic level (see, for example, Gordon, 2000, Triplett, 1998), at the firm level, there is a substantial and growing body of evidence linking ICTs with both higher productivity and organisational transformation (see, for example, Brynjolfsson and Yang, 1996; Bresnahan, Brynjolfsson and Hitt, 2000). Brynjolfsson and Hitt (2002: 4) argue that firstly a significant component of the value of ICTs is related to the ability of computers to enable complementary organisational investments such as business and work practices; and secondly, these investments lead to productivity increases by reducing costs and enabling firms to increase output quality in the form of new products or improvements in intangible aspects of existing products such as convenience, timeliness, quality an variety (Howell et al, 2004). Milgrom and Roberts (1990, 1991) introduced the notion of complementarities, using the example of the falling cost of high speed data communication, data processing, and flexible multitask equipment. They argue that investment in these technologies lead to “increases in the directly affected activities, which through a web of complementarities then lead to increases in a set of related activities as well” (1991:84)
At what level does the technology operate?
Reinforce existing competitive focus
Change Competitive role of the Operation
Network/Industry Level
2.3 Operations strategies and ICTs
Business Level
Operations managers are responsible for producing the supply of goods and services in organisations, thus they make decisions regarding the operations functions and the transformation systems used. The operations strategy of a firm is the what and how of activities directed towards distinctive operations competence that evaluate potential impacts of situations and alternatives in structured time dimensions, and integrate a pattern of decisions to balance the resource commitments, output requirements, and risks in various focused
Shop/Factory Level
Process Level What is its competitive objective?
Figure 1. Level and purpose of ICTs
680
The figure above combines these dimensions of level and purpose into one framework (Upton, 1995)
A major strength of Gallagher has always been its extensive overseas distribution network. Distributors have sometimes been set up under existing agency companies, but most often companies have been set up under local control with a minority Gallagher shareholding. The company has retained almost all of its international distributors since it began exporting in 1967. Gallagher also prefers to deal with small family owned businesses where there is continuity of management and where loyalty and trust develop through several generations. Many of the distributors in Japan, Holland and the UK are second-generation family businesses.
3. CASE STUDY This case describes the implementation of the SAP R/3 software system at Gallagher Group Ltd, one of New Zealand’s leading manufacturers and exporters. The decision was initiated by the inability of their existing software to cope with developments in the business, such as faster response times and more make-to-order, and by the need to integrate the increasingly complex and far-flung organisation that Gallagher was becoming with subsidiaries in New Zealand and overseas.
3.2 Operations strategy and ICT investment The company manufactures its final products in New Zealand. It operates with a flexible skilled workforce with a salary only pay system. While it no longer believes its manufacturing operation is a primary source of competitive advantage (because of the impact of Chinese manufacturers and low price competition), it now sees manufacturing as an integral part of its supply chain, as service, distribution, leading-edge technology, product range and reputation are key competitive advantages. Gallagher has about 2000 SKUs, and there could be up to 200 SKUs in one electric fence installation: from porcelain insulators, to wire, to electronic circuit boards.
3.1 Company background Gallagher is a privately-owned and family-run manufacturer of movement control products, i.e. electric fences, security fences, access control systems. There are about 450 employees, including highly skilled toolmakers and engineers as well as multi-skilled shop floor assembly workers. The Gallagher Group’s products are now sold over 120 countries; it sells directly to 65 countries and has subsidiary companies in 14. About 80 percent of production is exported. Bill Gallagher (CEO) says the company’s exporting success is due to having the right partners and distributors round the world and being the most exciting and profitable product on the market. Gallagher’s creation of a leading position in mains-powered electric fencing across European markets in the late 1970s was the outcome of: the early development of this technology in government science laboratories in New Zealand; the early threat of a local competitor establishing a lead in the new technology; Gallagher’s own long-standing experience, reputation, and marketing networks in battery-powered electric fencing in the New Zealand market; and the passage of leadership to the next generation of the family, open to new distribution strategies that quickly established a network of independent dealers for Gallagher systems across Europe ahead of a Danish competitor who was slower to extend its market reach. In the transition from a small, New Zealand-focused manufacturer of a broad range of agricultural equipment into a position of global leadership in the tightly-focused product line of electric fencing systems, Gallagher thus used established resource-based advantages in local-market expertise and reputation as points of leverage to create new resource-based advantages of innovation, and networks of relational assets, around a radically-changed strategy of product focus and global scope, that radically redefined the firm’s relationship to its environment (Brocklesby et al, 2001).
In 1988 the company somewhat reluctantly decided to install the Manufacturing Resource Planning II (MRPII) computer management system as it faced worsening inventory turnover performance. At the time it was the biggest single investment ever made by Gallagher, but it paid for itself in its first year through inventory reduction alone. MRPII exposed areas where jobs were not being done properly. The smokescreens of the past were gone. By necessity, all departments were forced to operate as a team under MRPII. In 1999 the Gallagher Group again upgraded its computer based manufacturing management systems. It replaced the MRPII network with a $2 million investment in an enterprise resource planning (ERP) system and chose the SAP R/3 product. SAP AG is a German company and is the largest supplier of ERP systems worldwide, with more than 32000 companies running SAP in 2005. The SAP R/3 system integrates, among other processes, sales, operations and shop floor planning processes across the entire company, including subsidiaries. It is more comprehensive than MRP and is constantly updated through research and development. There were several key drivers for the investment in the ERP system and most notably the desire for integration across all operating units and regions in the total Gallagher business. In addition, Gallagher has reduced its supplier base from 400 to about 150 over
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recent years and for many items it has single source supply. This development is based on their desire for closer partnerships with their suppliers by giving fewer of them larger orders.
processes and is often a cause of poor or over budget implementation. Tucker estimates that only about $2000 would have been spent on customisation. Gallagher does not have a large corporate structure. The IT technical staff report to the senior executive in charge of R&D. What Gallagher have developed is a team of six people who have become very skilled in the R/3 product and have a skill set that is probably higher than that of the consultants used on the implementation. This group is now doing all the configuration work in-house. It is also doing all the work to bring the subsidiary company operations in the USA and UK onto the ERP network. Tucker estimates that spending on outside consultants to work on the ERP system is minimal and less than $10000 per annum.
Gallagher were unsure of how sophisticated a system would suit them best as, on a world scale, they are a small business, and they “were a bit nervous about picking one of the top systems”. In order to compare and contrast the available product offerings, they formed a project team of key users, that is, people from all the business units and functions that were likely to be users of such a system. They scanned the available suppliers and invited six of them to make presentations on how their systems would deal with what Gallagher perceived as its areas of weakness, such as inventory management and forecasting. They chose a mixture of what they called “tier 1” and “tier 2” systems. The former were the firms with largest market share such as SAP, Oracle etc. and the most powerful products, and the latter were vendors with products that were perceived as being able to do the job but with lower level of potential functionality. After these presentations, Gallagher produced a short list of three and went back to each of them with far more detailed scenarios of idealised business processes.
Gallagher’s investment in the SAP R/3 software is an example of an improvement-driven IT decision where they decided what they wanted the system to do and then proceeded to acquire it. Steve Tucker believes that the investment has produced some tangible results. The company is now, or soon will be, completely on one system so all information will be visible to all parts of the Gallagher Group. The company is now bigger than it was when the decision to purchase was made and yet there has been little increase in overhead. Tucker believes part of the reason is the investment in R/3.
As a result of this process, the project team felt SAP R/3 would deliver significantly more than the other products. They felt comfortable with choosing a tier one vendor even though by SAP’s standards they were a small business. They were also more comfortable with the ability of R/3 to handle the requirements of a new customer that wanted to deal differently with Gallagher than existing customers. Finally, SAP offered a highly attractive price to the firm, as they were aggressively seeking market share among companies of similar size to Gallagher.
Gallagher has been working on process improvement continually over many years and, as mentioned above, had found it reached a point where the old system could not cope with the demands of the new business processes. Tucker believes some companies do not go far enough in improving their existing processes before introducing new IT and this is often a cause of disappointment with the results. Since implementation of SAP R/3, Gallagher have achieved an improvement in many key operational measures, e.g. in DIFOTIS (delivery in full on time in specification) they are now operating at high 90s percent for New Zealand customers and mid 90s percent for overseas customers.
Once Gallagher’s board approved the purchase of the R/3 platform, the project team, headed by Mr Steve Tucker (Operations manager), sought out an implementation partner as SAP do not carry out this phase themselves. The two options were either to go with one of the Big Six accounting firms that have consultancy arms specialising in ERP implementations, or choose a partner with more experience working with companies the size of Gallagher. The team felt nervous of using one of the Big Six as their approach involved greater division of tasks and Gallagher felt somewhat uncomfortable with this. Gallagher chose a smaller firm, Supply Chain Consulting, whose approach to implementation was much more of a partnership format.
In the three years since the system was put in, Gallagher has changed significantly. Its sales have grown, it has new fully-owned subsidiaries, it has more offshore subsidiaries, and it has entered the security access control business. Tucker explains that this has all been done with a similar level of overhead, management and control structure, and firmly believes that they could not handle the business transactions they now do without the investment in R/3. Gallagher feels that Government, in promoting the idea of the Information Economy in New Zealand, does not fully appreciate the high financial and business risks from ICT investment such as they have made. Over recent years, the company has been investing about $1-1.5 million per year in new
The implementation took about nine months and went live in June 2000. One notable feature was that they avoided the need for a high degree of customisation of the software. This occurs where the software has to be changed to suit Gallagher’s
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manufacturing technology such as a new surface mount machine in the electronics factory and a new 650 tonne injection moulding machine in the plastics factory. These are tangible pieces of equipment that have a very high probability of being delivered and working as they are supposed to work. By contrast the investment in SAP R/3 was an additional $2 million in one year on something that has a much lower probability of working as it is supposed to work and deliver the results, and is much less tangible. Gallagher sees such investment as highrisk projects, not only because of the financial implications but also because they are critical to the long-term growth of the company thereafter, if they do not work out as hoped.
business in new ways and because the platform that they were running on could not really keep pace with these changes, e.g. wanting to make more product on a make to order basis rather than a make for stock basis, and wanting to forecast at a certain level and line up the raw materials but not make the final products until the order came in. There is, thus, no substitute for business managers and decisionmakers knowing their own business and industry, and how business models are changing, as this enables them to select, customise and prioritise the development. There is also no substitute for having knowledgeable and experienced staff participating in the development and implementation of ICT applications, and an organisational commitment to ongoing training and learning in both ICT and other organisational systems.
In terms of human capabilities, Gallagher has developed its people in the SAP R/3 software environment as mentioned above. They have users at all levels in the organisation so there has been a widespread upgrading of staff computer skills as a result. The company has not had problems recruiting technical staff. Tucker believes there are plenty of “technically savvy people being pumped out of universities” but what is lacking in these people is their having knowledge of how businesses run, how to use process improvement tools, and understanding how to manage change in businesses. Gallagher is confident that this investment in ICT has resulted in increased productivity and economic benefit, especially in terms of inventory management, and service to customers. The business is now more complex in terms of the numbers of transactions taking place than it was three years ago when the investment was made, and the system has been able to handle the growth and changes quite comfortably. Gallagher now has an in-house team that has become highly skilled in software improvement, and has little use for outside consultants. Staff at all levels interact with the software and have input into improving its operation.
Successful implementation and use of ICTs is contingent upon the extent to which managers and decision-makers first know and understand the characteristics of their product, business, industry and trading environment. If managers and decisionmakers understand their individual ‘value chain’, then they will be clear about the ways in which they derive value from their businesses, how information contributes to this process, and therefore have a much clearer understanding of both where the ICTs will fit in their individual value chain, and the extent to which they can add to the value created. This positions them to be better able to manage the costs, risks and opportunities that they face in their businesses. When this degree of clarity is present, then it is much more likely that the firm has both a clear strategy to guide its decisions and operations, and a fuller understanding of the ways in which any technology fits into the value-creating process. Thus, the technology purchase and implementation becomes an integral part of the firm’s strategy, whether it is the use of a technology to gain a competitive advantage or investment being undertaken merely to “keep up with the state of play in the industry” (Howell et al, 2004).
Management at Gallagher sees their path as being improvement-driven IT and so cannot identify the ICT as being a direct cause of business improvement as they are continually working on their processes. They see the ERP system as an enabler and feel they would not be where they are today without having made the investment. On the other hand, they have also found that the functionality of the software has instigated some IT-driven improvements in some processes. The full functionality of the Advanced Planner and Optimiser (APO) module has not yet been fully exploited, however, as Gallagher have preferred to concentrate on what is available within the core R/3 product to date.
Firms with this level of understanding will be better placed to implement ANY new technology successfully. The technology purchase is much more likely to be based upon a well-reasoned analysis, and implementation planned and prioritised in such a way that the most valuable or the most fundamental components are installed first. Thus, success is more likely. Notably, well-reasoned analysis also reduces the probability of a firm investing in a technology merely because it exists or because it has been implemented elsewhere. Many writers have discussed the perils of automating a poor process (e.g Upton, 1995) Knowledge of specific firm and industry characteristics will mean that reasoned abstention from specific purchases can be a
4. CONCLUSIONS The investment in the ERP system at Gallagher it was stimulated by wanting the ability to run their
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Milgrom, P., and J. Roberts (1990). The Economics of Modern Manufacturing; Technology, Strategy and Organization, The American Economic Review, 80, 511-528. Milgrom, P., Y. Qian, and J. Roberts, (1991), Complementarities, Momentum, and the Evolution of Modern Manufacturing, The American Economic Review, 81, 84-88. OECD, (2003) ICT and Economic Growth: Evidence from OECD Countries, Industries and Firms. OECD Paris. http://www.oecd.org. Perelman, M. (1998). Class Warfare in the Information Age. St Martin’s Press, New York. Stonebraker, P W. and G. K Leong. (1994), Operations Strategy: Focusing competitive excellence, Allyn and Bacon. Boston Triplett, J E. (1998). The Solow Productivity Paradox: What do Computers do to Productivity? Brookings Institution. http://www.brookings.org. Upton, D M. (1995). Designing, Managing and Improving Operations, New York Prentice Hall. Zachman, J. A., (1987), A Framework for Information Systems Architecture, IBM Systems Journal, 26, 276-292.
profitable strategy in some circumstances. Knowing what these circumstances are is critical. To summarise the key steps in this successful implementation would be: senior managers have deep process and business knowledge, the firm has a strong improvement focus, a clear and agreed understanding of what is the desired outcome, careful vendor selection, careful implementation partner selection, user involvement in the process, development of human capabilities within the firm (so avoiding the need for on-going external assistance). This implementation process would seem to fall in line with that proposed by Zachman (1987), where it is organised around the points of view taken by the various players. The people at Gallagher, however, did not know of this framework but appear to have stumbled on it anyway. REFERENCES Arrow, K. J. (1999). Information and the organisation of industry. In: Markets, Information and Uncertainty: Essays in Economic Theory in Honour of Kenneth J. Arrow. (Chichilnisky, G. (Ed.)) Ch. 1. Cambridge University Press. Cambridge UK. Bresnahan, T. F, E. Brynjolfsson, and L. M. Hitt. (2002). Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence. Quarterly Journal of Economics.117, 339-376. Brocklesby, J., C. Campbell-Hunt, and L.M. Corbett (2001). Evolving order: Organisations as Cognitive Systems, European Group for Organisation Studies, Lyon, July Brynjolfsson, E. and L. M. Hitt. (2002). Beyond Computation: Information Technology, Organizational Transformation and Business Performance. Keynote address given at the North American Productivity Workshop, Schenectady, New York; June 21. . Brynjolfsson, E. and S. Yang. (1996). Information Technology and Productivity: a Review of the Literature. Advances in Computers 43, 179-214. Gordon, R J. (2000). Does the ‘New Economy’ Measure Up to the Great Inventions of the Past? National Bureau of Economic Research Working Paper 7833. http://www.nber.org/papers/w7833. Hayes, R H. and S C Wheelwright, (1984) Restoring our competitive edge: competing through manufacturing. Wiley, New York Howell, B., L.M. Corbett, V. Mishra, and L. Ryan, (2004). Information and Communication Technologies in New Zealand, A Report for the Ministry of Economic Development, Victoria Management School, Wellington.
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