A real option theoretic fuzzy evaluation model for enterprise resource planning investment

Authors:
Chew Jian You;C. K. M. Lee;S. L. Chen;Roger J. Jiao
Affiliations:
Division of Systems and Engineering Management, School of Mechanical and Aerospace Engineering, Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore;Division of Systems and Engineering Management, School of Mechanical and Aerospace Engineering, Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore;Division of Systems and Engineering Management, School of Mechanical and Aerospace Engineering, Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore;Georgia Institute of Technology, The G.W. Woodruff School of Mechanical Engineering, 813 Ferst Drive, NW Atlanta, GA 30332-0405, United States
Venue:
Journal of Engineering and Technology Management
Year:
2012

Citing 15
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Abstract

The high failure rate of ERP implementation is due to a common pitfall that ERP projects are often enacted as merely investment into installation of IT infrastructure, rather than systematic planning of operation changes, business process re-engineering and a paradigm shift for the operation and management. To manage ERP investment in a changing environment for high payoff, this paper adopts a real option theoretic method. Fuzzy payoff valuation is introduced to deal with uncertainties in order to minimize the risk of failure. The proposed ERP evaluation model is geared towards small and medium enterprises. A case study is presented to validate the proposed fuzzy real options. The results indicate the potential of modeling ERP investment as ''Expand'', ''Contain'' and ''Abandon'' options in different scenarios. The fuzzy real option model bestows a novel ex-ante cost analysis for justifying ERP investment in the implementation cycle.