Factors Influencing Benefits of Inter-Organisational Systems (IOS) Adoption
Mahbubur RahimSchool of Business Systems
Monash University, Clayton VIC 3168
Australia
Email: / Sherah Kurnia
Department of Information Systems
The University of Melbourne111 Barry St, Carlton, VIC 3010, Australia
Email:
ABSTRACT
The adoption of inter-organisational system (IOS) has become important for many organisations because of its many benefits, which can be categorised into operational, managerial and strategic benefits. While some organisations have gained many benefits, some have experienced very limited benefits from IOS adoption. Existing studies have identified a number of factors affecting the achievement of IOS benefits. This is a research-in-progress study that is aimed at assessing the relevance of factors identified from the literature in explaining the benefits obtained by Australian organizations from IOS adoption, using four case studies conducted with two pharmaceutical and two grocery manufacturing companies.
Keywords
Inter-organisational systems, IOS, IOS benefits, factors, case study, Australia
INTRODUCTION
Inter-organisational systems (IOS) are important information technology (IT)-enabled business initiatives that support key boundary-spanning activities of organisations. These systems form the foundation of business-to-business e-commerce operations due to their ability to facilitate exchange of information between trading partners along supply chains (Senn 1996). By enabling exchange of business information between organisations, IOS thus enhance organisational efficiency (Abcede 1996; Kaefer et al. 2000; Meier et al. 1991), improve quality and timeliness of information (Silverman 1990), and even enable entire supply chains to reduce wasteful inventories by reacting more effectively to customer demand and jointly planning product introductions and promotions (Ross 1996; Soliman et al. 2004). Additionally, IOS enable customer services people to be more responsive to customer orders rather than requiring them to act as order takers, which in turn greatly improves relationships with business partners (Applegate et al. 1996; May 2000). These systems also bring significant competitive advantage to organisations by increasing their bargaining power and by raising the switching costs of trading partners (Johnston et al. 1988). However, it is reported in the IOS literature that different organisations experience different benefits as a result of IOS introduction. Existing literature has identified a range of organisational, innovation related, and environmental factors that affect the attainment of benefits from the introduction of IOS. Most of these factors were identified in the contexts of IOS adoption initiatives examined in North American and European organisations. It is not clear whether these factors are also applicable in understanding IOS benefits in Australian organisations.
At the moment, there is a limited understanding of how Australian organisations receive benefits from IOS adoption and what factors affect the attainment of these benefits. With the exception of Mackay’s work (Mackay et al. 1996) which focused on understanding the use and benefits of EDI-enabled e-procurement initiatives in the Australian automotive industry, little is reported about the benefits of IOS use particularly in relation to the Australian pharmaceutical and grocery industry segments. Hence, it is not known whether the factors reported in the IOS literature have an ability to explain IOS benefits experienced by companies operating in those two industry segments which contribute significantly to the Australian economy.
This study aims to assess the applicability of those factors identified from the literature in explaining the IOS adoption benefits experienced by Australian organizations. We start with identifying various factors affecting IOS benefits from the literature. Then we examine the benefits arising from the introduction of IOS initiatives in the contexts of the Australian pharmaceutical and grocery industries by re-analysing our previous in-depth case studies in two pharmaceutical and two grocery manufacturing companies that have adopted IOS. This is research-in-progress paper and at this stage, we have only identified benefits experienced by the case organizations in terms of operational, managerial and strategic benefits.
In the next section, we present a brief literature on IOS benefits to identify various factors affecting the attainment of IOS benefits by organisations. Then we describe the research method briefly, the case study participants and the IOS adopted, followed by a brief discussion on the benefits achieved and tentative conclusions about possible factors affecting the achievement of operational, managerial and strategic benefits.
LITERATURE REVIEW
There are enormous IOS benefits which can be categorised into operational, managerial, and strategic benefits. Operational benefits refer to the improvements made to the internal functioning of an organisation (Banerjee et al. 1994). They typically include reduced paper work, fewer data entry errors, reduced manpower, and reduced inventory. Managerial benefits refer to those that enable managers to perform their functions more effectively by analysing quality information at the right time (Murphy et al. 1998). Typical managerial benefits include improved quality of information, the ability of managers to access information quickly, and greater ability of managers to make better decisions. Strategic benefits result from the development of corporate strategies to gain competitive advantage and to increase market-share through strengthening close relationships with trading partners (Reekers et al. 1994). A number of organisations adopting IOS have gained IOS benefits at the three levels, while some have only gained limited operational benefits.
There are a number of factors affecting the attainment of IOS benefits by organisations, which can be classified into three categories: organisational, IOS adoption process and environmental contexts. Each of these is briefly discussed below.
Organisational Context
At the organisational level, support from the senior management is essential to ensure benefits from IOS (Kurnia et al. 2000; Lee et al. 2000; Reich et al. 1990). This is because a good understanding of the senior management regrading various types of benefits to be gained from IOS encourages their commitment to IOS. Organisations in which senior management commitment for IOS are high generally allocate sufficient amount of financial and manpower resources to support electronic relationships (Mackay et al. 1996). High management support means that they have strong willingness to invest in IOS integration with back-end information processing applications which is essential to receive substantial benefits from IOS. Greater benefits from IOS can also be achieved when appropriate changes in business processes are introduced in conjunction with IOS. However, process changes may affect job responsibilities and even organisational structure and hence cannot be initiated without full support from senior management. Furthermore, it is hard to gain IOS benefits when business partners are reluctant to join the IOS network. Hence, management support is strongly needed to persuade business partners to embrace IOS and make necessary changes in the inter-organisational work flow.
Adoption Process Context
Adoption process context refers to the manner in which an IOS application is introduced in organisations. It includes IOS integration, IOS transaction ratio, IOS enabled process changes. These factors play an important role in affecting the benefits to be gained from the successful adoption of IOS. IOS integration is defined as the seamless electronic exchange of data between IOS and back-end operational applications such as ERP systems, inventory systems, purchasing management systems among others. A seamless IOS integration implies that human intervention is not required for entering transaction data which in turn improves data accuracy, reduces paperwork, and enhances the quality of decisions due to quicker availability of timely information. This line of argument is consistent with the findings reported by Mackay and Rosier (1996) and Balsmeier (1996) who found that organisations received considerable benefits when their EDI enabled electronic purchasing systems were integrated with back-end key IT applications.
IOS transaction ratio refers to the percentage of transactions an organisation conducts electronically through the IOS in place. Organisations with greater IOS transaction ratio are more likely to receive such operational benefits as improved data accuracy, reduced paperwork, and even reduced workforce required to support business transactions (Kurnia and Johnston 2000).
The benefits from IOS can also be affected from the inefficiency inherent in the existing inter-organisational business processes. Considerable benefits could be achieved when such inefficiencies are addressed in conjunction with IOS through process changes. For instance, with paper-based systems, the benefits of just-in-time (JIT) strategy is usually difficult to gain because of the inefficiency involved. However, through business process re-engineering, for example by introducing direct computer-to-computer communications facilitated by EDI between supply chain members instead of relying on paper-based sytems, organisations are likely gain significant benefits of JIT (Arunachalam 1995). IOS often encourages organisations to reengineer their existing business processes which, in turn, offers substantial strategic benefits (Angeles et al. 1998). In the retail industry, the delivery process was improved due to the introduction of quick response strategy which would not have been possible without the introduction of IOS technology.
Environmental Context
Cooperation from business partners refers to the willingness of trading partners to make an effort towards receiving benefits from the introduction of IOS. Cooperation from business partners is absolutely necessary in enabling IOS to offer benefits to all members of a supply chain. IOS affects inter-organisational work processes and without active support from the trading partners, it would not be possible to bring any improvement in work processes. The changes that IOS could bring in work processes need to be appreciated by the trading partners. The benefits of IOS would flow when business partners are willing to establish procedures and adjustments in inter-organisational work processes (Karonis 1997; Lee et al. 2003). IOS also may demand integration of incompatible IT infrastructure and business processes. Hence, organisations need full cooperation from business partners. With high level of cooperation, it is also possible to improve IOS transaction ratio. According to some authors {see for example, Lee, 2000 #406 and Kurnia, 2000 #412}, a high level of cooperation from trading partners is essential to receive IOS benefits because automation of inter-firm transactions removes most of the manual control systems and paper trail that currently exist to ensure the accuracy and integrity of transactions.
RESEARCH METHOD
In this study, an exploratory case study approach was adopted as the research method for two reasons: first, the research is in a preliminary stage and second, the context of IOS adoption is important as IOS benefits are likely to be influenced by context. We included four cases from our previous case studies assessing IOS adoption in Australian pharmaceutical and grocery industries to find out whether IOS benefits are affected by the variations in organisational and industry contexts. In each case study, several interviews were conducted and data analysis involved analysis of information from interview transcripts, emails, internal company documents, other archival sources and website analysis.
DESCRIPTION OF CASES
Brief profiles of the four participating case companies are summarised in Table 1. Case A is a pharmaceutical manufacturing company which was founded in early 1960’s. Its products provide blood, renal and intravenous therapies which the Australian medical researchers currently use to make new breakthroughs in patient treatment. As the bulk of these products are high volume fluid in nature, the company always supplies them direct to hospitals and medical clinics. Information technology is widely used within the pharmaceutical company. It spends about A$3.5 million annually on IT operations. Its key IT systems include pharmacy production system and electronic catalogue system both of which run on an IBM AS/400 platform. In late 1999, the company had introduced JdEdward’s World ERP system which also runs on IBM AS/400 platform. The company however has some applications that operate in PC-based NT environment.
Case B is another pharmaceutical manufacturing company that specialises in the development and manufacturing of biologically based health care products which are sold through several wholesalers. The company also develops new products and has invested heavily in medical research. This company was established in early 1900s and has experienced considerable growth in terms of manpower and sales. The company currently has 600 employees and their sales revenue was over A$170 million dollars in 2000. The company has been using information technology for many years. The IOS in question is an EDI system which they have operated for the past 5 years.
Case C is a food and grocery manufacturing company which is one of the leading food and grocery manufacturers in Australia. The company operates in approximately 80 countries, employing approximately 300,000 employees, with an average turnover of AU$60 billion. The company manufactures several major product categories, with its businesses broken into strategic business units, based on product category orientations, such as: beverages, ice cream, canned fish, value-added carbohydrate, dried and wet cooking sauce, and margarine. It is now experimenting with various IOS such as Category Management and Continuous Replenishment Program (particularly cross-docking) as part of implementing Efficient Consumer Response (ECR) initiatives with major Australian retailers. Both business initiatives rely on EDI for data sharing. For brevity, only the case of CM is included in this paper.
Case D is another large food and grocery manufacturers in Australia, with average annual sales of AU$55 billion. It competes in 50 different categories, with over 300 brands, and operates in more than 70 countries. This company employs 110,000 employees worldwide and sells products in more than 140 countries. Its parent company is based in the United States. The company has been in the Australian grocery business for around 20 years. It is involved in a Vendor-Managed Inventory (VMI) project with one of the major Australian retailers, which relies heavily on data sharing via EDI.
CaseSite / Nature of
Business / Annual Sales / Total
Staff
A / Pharmaceutical manufacturing / A$250 millions / Over 600
B / Pharmaceutical manufacturing / A$170 millions / 600
C / Food and grocery manufacturing / AU$60 billion / 300,000
D / Food and grocery manufacturing / AU$55 billion. / 110,000
Table 1: Major features of the participating case companies
DESCRIPTION OF IOS USED IN CASE COMPANIES
In the pharmaceutical company (i.e. case A), a web-based EDI system was introduced in late 2000 which runs in the NT environment. EDI messages are received in the NT system from customers through an exchange gateway which is maintained by a third party network service provider. Two types of EDI messages are exchanged via EDI: the company receives purchase orders in EDI format and sends back purchase order acknowledgements to its customers which are basically large hospitals. Purchase orders once received are then sent to the back-end ERP system via an electronic interface built by the company.
Another pharmaceutical manufacturing company (i.e. case B) has been using a PC-based standalone EDI system since late 1990s. The system is used to receive purchase orders directly from a large pharmaceutical wholesaling company and send back confirmation. Once the purchase orders are received via EDI, they are then typed in manually and are fed into the company’s internal information system. The EDI messages are sent through a network services provider enabling the company to download purchase orders from its mail boxes. The EDI messages are prepared based on the EDIFACT standard. Currently, the company receives about five purchase orders a day, but they involve a huge volume of sales. The company did not integrate EDI with their back-end information systems due to the limited number of EDI transactions and high cost of integration.
The first food and grocery manufacturing company (case C) has been practising the CM program with two major retailers since 1996. In support of CM and other business initiatives proposed by ECR, the company has also established an EDI connection with the two retailers using a third party network since mid 1990s to improve data sharing. The EDI message standard used is EDIFACT. EDI is used to receive purchase orders from the major retailers and to send purchase order acknowledgement and advanced shipping notice. With one of the retailers, the EDI system is also used for receiving the point-of-sales (POS) data for all product categories supplied by company C on a weekly basis. This allows the manufacturer to optimise its product range and evaluate promotions and new product introduction efficiently.
The second grocery manufacturing company (case D) has been using been practising the Vendor-Managed Inventory (VMI) program to improve inventory management for both the manufacturer and the retailers. However, at the time the case study was conducted, the company still had limited EDI transactions. The company receives information from the retailers’ distribution centres about product withdrawal and their stock-on-hand via EDI. Based on this information, company D then sends recommended purchase orders to the retailers and communicate these orders via fax. Company D was not able to send advanced shipping notices to retailers at the time the case study was conducted. A summary of the IOS employed by the case study participants are presented in Table 2.