THE ROLE OF ENTERPRISE INFORMATION SYSTEM IN GLOBAL SUPPLY CHAIN FOR COFFEE INDUSTRY IN INDONESIA

by

Hadiyan Wijaya IbrahimFakultas Teknik Jurusan Teknik Industri

Universitas Medan Area, 20223Medan, Indonesia

Tel: 061 7366878, 7366998, Fax: 061 736068 Email: hadiyan_tmi_itb@yahoo.com

and

Suhaiza Zailani Graduate School of Business,

Universiti Sains Malaysia, 11900,Penang, Malaysia

Tel: 04 6533888, Fax: 04 6577448Email: shmz@usm.my

ABSTRACT

Global supply chain is a critical organizational competency in today's dynamic global environment. This paper explores the role of enterprise information system (EIS) in global supply chain for coffee industry in Indonesian and the impact of enterprise information system in global supply chain. The importance aspect will show how enterprise information system through information technology enhances global supply chain for managing finance and risk in global supply chain. It is importance that coffee industry in Indonesia as a global business in commodity trading can provide information for international trading. Information system (IT) as technology development provides not only opportunities, but also threats, for individual organizations. The development of IT will increase the competition base through easy access to global organizations of suppliers; hence, competition is no longer local but international and advanced information systems can reduce the transaction costs associated with the control of goods flow and make a quick response to customer orders. Organizations cannot effectively manage cost, provide superior customer service, and be leaders in global supply chain without leading-edge information systems. This paper will be determine the role of enterprise information system for managing finance and risk in global supply chain based on assumptions that information systems play an importance role in enhancing organizational capability to exploit IS-based competitive advantages in transformation to superior performance. In other words, this study is expected to contribute further knowledge; especially about the role of enterprise in global supply chain and managing finance and risk in coffee commodity trading.

KEYWORDSEnterprise Information System, Global Supply Chain, Coffee Industry, Managing Finance and Risk, Indonesia

INTRODUCTION

In order to compete in an increasingly demanding market, many exporting companies including the coffee industry in Indonesia have to meet the challenges and demands posed by the current global trading environment and have to redesign their manufacturing, including designing the enterprise information system to support decision making strategy. The complexity involved in these systems requires a more systematic approach to be problem solver (Wu &Chang, 2000). Moreover, the emergence of the networked enterprise has a profound effect on enterprise computing with the objective of achieving added value and more business opportunities. Therefore, Companies should be flexible, adapted, and able to exploit technological changes and continue to follow the market changes and improve the relationship of business partners. In addition, company will be a very dynamic and opportunistic in collaboration with its partners to pursue the objectivity of business partner, this requires great flexibility with proper technology support(Sinderen, 2008).

Globalization has restructured the business world and introduced the concept of a global supply chain which is consists of companies networking and outsourcing all over the world (Balan, Vrat, & Kumar, 2006; Prasad & Sounderpandean, 2003). Hence, the broad research question addressed in this study is, “Is an organization's global supply chain in coffee industry in Indonesia is strengthen by enterprise information system and does enterprise information system in global supply chain has a role to manage finance and risk that effect on company performance?”. This paper presents the role of information system in global supply chain by addressing two important issues. First is the development of constructs that are proposed as a concept of global supply chain and the second the study will examine the role of enterprise information system, managing finance and risk for coffee industry in global supply chain.

LITERATURE REVIEW

It is widely accepted in the literature that supply chain management is important for material and information flows relating to the transformation of the materials into value added products, and the delivery of the finished products through appropriate channels to customers and markets so as to maximize customer value and satisfaction. Humphreys, Lai and Sculli, (2001) have reviewed the theoretical foundations for the study of inter-organizational relationships within a supply chain management context, and analyzed the contingencies of deploying inter-organizational information systems (IOIS).Consequently, the introduction of information system by a firm for supply chain management could leadto better efficiency and effectiveness (Goldhar & Lei, 1991; Sullivan, 1985). For example, the members of the chain can share the database for supply that enables the company to identify optimal inventory levels, reduce warehouse space, and increase inventory turnover (Kaeli, 1990).

In order to be competitive in the world market, many exporting companies including the coffee industry in Indonesia have to meet the challenges and demands posed by the current global trading environment. As competition in the 1990s intensified and markets became global, so did the challenges associated with getting a product and service to the right place at the right time at the lowest cost (Li and Lin, 2006). According to Tsai and Lin (2009) the question is how these companies can use their competitive advantage in the global supply chain to run their global market operations. In the current global market, industries have to plan and design an effective supply chain, either upstream or downstream to provide the product to the customer. This is known as the concept of supply chain. Globalization has restructured the business world and introduced the concept of a global supply chain; a global supply chain consists of companies networking and outsourcing all over the world (Balan, Vrat, & Kumar, 2006; Prasad & Sounderpandean, 2003).

Global supply chains have become a key component as challenges of an accelerated global economy. Many industries have developed effective global supply chains that deliver quality products at the lowest cost to end consumers. Consequently these products and hence industries are able to dominate the global market (Yoon & Sil 2004). Now, organizations began to realize that it is not enough to improve efficiencies within an organization, but their whole supply chain has to be made competitive. The understanding and practicing of Supply Chain Management (SCM) has become an essential prerequisite for staying competitive in the global race and for enhancing profitably (Childhouse & Towill, 2003; Rahman, 2004; and Tan, Lyman & Wisner, 2002). Organizations also cannot effectively manage cost, provide superior customer service, and be leaders in SCM without leading-edge information systems (Turner, 1993).Furthermore, Evans, Naim, and Towill, (1993) stated technology development provides not only opportunities, but also threats, for individual organizations. For example, the development of information technology will increase the competition base through easy access to global organizations of suppliers; hence, competition is no longer local but international. Recent writings argue that the management information systems (IS) function should no longer be viewed in its traditional role, but in terms of a strategic role for exploiting IS-based competitive advantage. We believe that formalized systems play an important role in providing an institutionalized mechanism to exploit such advantages. Alternatively, these systems can be construed as necessary but not sufficient for the development of superior strategies, and the attainment of superior performance (Venkatraman & Raghunathan, 1986).

Enterprise Information System

Manufacturing is a complex application domain, and is highly dependent on information through a computer and computer-controlled machines. Advanced manufacturing company is rising toward a more nimble framework that must meet the demands for quick response to innovation technology, production specifications, market conditions and business constraints. These changes require significant advances in information systems (IS) infrastructure consisting of a variety of distributed, intelligent information and communications systems (Hye & Joel, 1999). Meanwhile, Swanson, (2008) stated enterprise information systems process highly abstracted information. On the other hand, Wang et al. (2006) point out those enterprise information systems are concerned with social systems at the organizational, societal, and supranational system levels of complexity, and become increasingly popular in the global expansion.

Enterprise information system as a complex network system has faced many safety and security issues Zhang, (2008) and usually a widely distribute operational information system (Wang et al. 2010). In global arena, modern enterprises significantly depend on the timely and sustainable delivery of information (Cai et al. 2006). That why to focus on this challenge toward, enterprise information systems (EIS) such as enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM), manufacturing execution system (MES), etc Wang et al. (2010), have been developed in the last decades (Izza, 2009; Liu et al. 2008). Meanwhile, an enterprise information system is a special type of information which is characteristic by a series of integrated software modules and databases are commonly used to help manage the human resources, financial, and service or manufacturing processes. Enterprise information system offers a variety of functional modules share a common database, typically, the company system is a collection of software component packages that are labeled as enterprise systems because they combine the most important functions of an organization. Enterprise information systems often replace a collection of independent software modules from several vendors, along with the traditional custom applications (Francalanci, 2001; Sawyer, 2001). This illustrates that information technology has an importance role in enterprise information system in enterprise it’s self. Further the role of enterprise information system will discuss in next section.

The Role of Enterprise Information System

In global information, enterprises more focusing on leveraging systems by using business-to-business (B2B) software products that integrated with the enterprise systems software and facilitated tighter linkages with upstream and downstream supply chain partners also become easier sharing information through electronically (Sutton, 2006). The term of enterprise is often used to describe almost any business related to activities of economic entities, joint ventures and special purpose entities. An entity that is used in the sense that developed as a form of corporate law that emerged from the sixteenth to the nineteenth century. Corporations, partnerships, and sole proprietorships are legal entities. Economic entities appear in the pattern of exchange and can be found by the auditors where most of the subsystems identified them as determinants that control components and determine the limits of physical laws (Swanson, 2008).According to Soja, (2005) the implementation of enterprise information system can perceive in term of positive and negative effects. On the other hand, the range of potential benefits is very broad and difficult to capture even though the company very concern to improve implementing of enterprise information system by using operational activity indicator(Parker & Benson 1988; Poston & Grabski 2000; Soja, 2008).

ERP is a system that concentrates on the realization of business integration concepts. The capabilities of ERPsystem can manage the physical assets within an enterprise (Xu et al. 2006). As mentions earlier by Wang et al. (2010) and (Francalanci, 2001; Sawyer, 2001), ERP system as a part of enterprise information system while, successfully implementing ERP system can integrated all area of an enterprise including customer relation, manufacturing, human resources, financial management and distribution with customers and suppliers, and data sharing (Mertins & Jochem, 2005). On the other hand, enterprise information system can help enterprises to improve competitiveness (Xu et al.2006). In general, Drucker, (1993) stated high-tech enterprise has to major type of assets, physical and knowledge assets. Knowledge asset as knowledge management is one of the most importance factors contributing to business success.

Enterprise Information System in Global Supply Chain for Coffee Industry

Information Technology (IT) is one important driving force that promotes global economic development after the industrial revolution. With developments in information technology, especially the application and popularization fast internet, information systems have been (IS) was taken on the trend growth of networks, integration, large scale and complexity. As the complex information system is fully embedded in various hierarchies of the enterprise and has a relation with the enterprise information system, so that information system becomes the direct driving force of the enterprise, changing from traditional background support to new business development, and becomes an important basis of the entire enterprise business process, an important element of enterprise products and services, as well as an important factor of enterprise competitive strategy Huanchun, (2009). It is well known that the scope of the company has grown dramatically along with the many challenges arise that have no scientific basis. The effect of this growth is how to manage business caused by the crime of large scope, which has increased the challenge for managers. Many of the companies now need for crossing international borders to compete, with rules derived from different government and different languages can also cause new problems (Warfield, 2007). Therefore, enterprise information system reflecting the wide range of application in enterprise, that why these requirements also indicate the huge risk of the enterprise application information system (Huanchun, 2009).

Introduction of information system by a firm for SCM could lead to better efficiency and effectiveness (Goldhar & Lei, 1991; Sullivan, 1985). For example, the members of the chain can share the database for supply that enables the company to identify optimal inventory levels, reduce warehouse space, and increase inventory turnover (Kaeli, 1990). Information system in supply chain management (SCM) has gained its importance recently due to its ability to reduce

costs and increasing responsiveness in the supply chain (Chopra & Meindl, 2001; Dagenais & Gaustchi, 2002; Lee, 2000; McLaren et al. 2004; Ndubisi & Jantan, 2003). Although the adoption of e-business in the supply chain brings many benefits to companies, recent studies have shown that many Indonesian companies are still not implementing e-business.In other hand, Pujawan, (2005) stated that in case of Indonesia, the development of global supply chain is still in its infancy and even when they exist; they are inefficient managed because as his point out many crucial aspects relating to the concept and implementation of supply chains have not been clearly understood. Whereas, a global supply chain refers essentially to the processes and activities that transform a product from its raw state until it is sold to a customer globally.Therefore, the ineffective implementation of information system in Indonesia impacts adversely on the coffee industry in the early stages of the global supply chain. For instance, farmers do not process the coffee to meet international standards because farmers do not have the knowledge and lack information regarding coffee processing (Kopi Indonesia, 2008). In case of coffee industry Evens & Mawardi, (2008) also claim that, traditional marketing system has been taken over by global supply chain, due in general to the private sector and also market driven forces that influence coffee as a world commodity. With regards to global operations in coffee industry, an enterprise information system is required for the integration of extended enterprises along the supply chain with the objective of achieving flexibility and responsivenessto the customers in response to the growing global competition.

Meanwhile, according to Mefford, (2006) in global expansion, multinational firm’s faced the challenges as well as opportunities. In other hand, coordination production and distribution can be a logistical nightmare. Fortunately, information technology has been developed along with rapid globalization of business among them. So, they can exploit the new opportunities in term of seeking new sources of low cost supply chain to find new potential markets for their products. Multinational companies in various countries also can join the computer systems of their subsidiaries using technology such as electronic data interchange (EDI) for order and invoices and electronic funds transfers (EFT) for financial transaction. Furthermore, bar coding and radio frequency identification (RFID) can provide good mechanism of movement tracking through the supply chain. Additionally, using the principles of lean production needed to establish supplier’s relationships based on flexibilities, high quality production, and short term contract that using by multinational firm. As a result integrated a global supply chain they can ameliorate some of negative consequences of globalization, for instance: low prices paid to small commodity producers. The benefits of improvement technology in supply chain are significant, now with the internet it is much easier to find suppliers and carry out the bidding and purchase order process in other countries.

Managing Finance and Risk for Coffee Commodity

Understanding the risk generally associated with the obtained results is not expected as VanHorne, (1995) stated “Risk can be thought at as the possibility that actual return from holding a security will deviate from the expected return. The greater the magnitude of deviation and the greater the probability of occurrence, the greater risk of security” of course, most of investors want to get a higher rate to compensate for the uncertainty, this additional risk is called risk premium. There are several sources of uncertainty which is a component of the risk premium as stated by Reilly (1994) “Business risk is the uncertainty at income flows caused by the nature at a firm’s business; Financial risk is theuncertainty introduced by the method by which the firm finances its investment; Liquidity risk: is the uncertainty introduced by secondary market for an investment; Exchange rate risk: is the uncertainty at returns to an investor who acquires securities dominated in a currency different from his or her own; Country risk: also called political risk, is the uncertainty at returns caused by the possibility at a major change in the political or economic environment of a country” various sources of risk mentioned are uncontrollable that is part of a company's external environment and affect the prices of securities, while others are relatively controllable, which is part of the company. Cleassens and Duncan, (1993) note there is several techniques and instruments used in risk management, which consists of a forward contract, futures contract, options contract, and swaps. Forward contract (futures contract) is an agreement to buy or sell an asset for a certain price in the future. Futures contract is basically similar to forward contracts, futures contracts are contracts that have met the established standard traded on commodity markets. Options contract and swap is not mention in this study.

Other terms related to financial instruments according to IAFE (International Association of Financial Engineering) financial engineering is the application of various mathematical, statistical, and computational techniques to solve practical problem in finance. Such problems include the valuation of financial instrument such as futures, options, and swaps; securities trading; risk management; and the regulation of financial market. Working, (1953) defined the future trading in term of commodities as “trading conducted under special regulations and conventions, more restrictivethan those applied to any other class of commodity transactions, which serve primarily to facilitate hedging and speculation by promoting exceptional convenience and economy of the transactions,” the emergence of futures trading because of highly fluctuations in commodity prices, that arising from unexpected variations in production, and the relative inelasticity of demand for consumption from uncertainties of supplies. Futures as financial instrument for coffee commodity trading in futures markets facilitate the transfer of risk, the difference between current futures prices and the expected price on the same contract at a later date is risk premium or market price (Bessembinder, 1992).

Coffee commodity trading actually has very good prospects, it causes a lot of interest in the commodity coffee companies to trade it both domestic and international market (cash market and future market). Commodity traders have to trade these products with highly fluctuating prices and very difficult to obtain accurate pricing as a guide in making the transaction so the company faced with the risk of highly price fluctuation. Basically, the price of coffee has a lot of variations depend on the price guidelines are used. In this case we will find the four benchmark prices used in doing a coffee commodity trade transactions, including: the terminal prices (international price), which are commodities exchange in New York (New York Mercantile Exchange); the local prices (prices in the physical market /spot market) is the price that made the purchase of coffee for export commodities; the price of reference also called with price of exporters or exporters and importers price, all four price are fluctuate individually, the prices should be synchronized so the trade risk can be minimize (Ibrahim, 2004). Further, to improve company performance, enterprise information system is play importance role for coffee commodity in global trading, because the companies always face of financial risk in global coffee market such as price fluctuation, and currency exchange.

Based on the amount of coffee price fluctuations from various sources, one of the main problem of risk has an impact on production and sales, whereas, the existing price fluctuations of risk cause difficulty on the price of planning due to decrease significantly from the expected price, it will available if we want to solved a set of forward markets problems and a number of claims which have been agreed. In fact Exporters, always makes the decision to sell the commodity without making a purchase beforehand, or make a purchase before the sale transaction done, which is the subject of the effect of price fluctuations before they can complete the second transaction. Meanwhile, after they had done purchasing maybe facing on price declines. In other hand, in price will increase after they made the decision to perform a forward contract, this would be little risk that the benefits will be obtained or not obtained the benefit even obtained substantial losses (Ibrahim, 2004). Further, Johnson, (1957) note in his study to take the opportunities and to seek the protection from coffee price fluctuation in both cash market and future market can be anticipate by implementing hedging concept.

ISSUES AND CHALLENGES

Indonesia is one of the biggest coffee exporters in the world, has 1,309,505 hectares of land cultivated with coffee. This area is spread over 31 provinces. This makes Indonesia the second largest coffee trader in terms of utilized area for coffee plantation after Brazil. However, in the past few years coffee commodity productivity has declined significantly. In comparison to other coffee exporting countries the Indonesian coffee products are not competitive in the international markets due to the high production costs faced by exporters coupled with high transportation costs, port fees and lack of infrastructures (Soedargo, 2008). In turn the productivity of the industry is affected resulting in products lacking the competitiveness advantage in the international market (Ramelan, 2005).

On the other hand, a global supply chain refers essentially to the processes and activities that transform a product from its raw state until it is sold to a customer globally. However in the case of Indonesia, the development of global supply chain is still in its infancy and even when they exist, they are inefficient managed because as Pujawan (2005) point out many crucial aspects relating to the concept and implementation of supply chains have not been clearly understood. Implicitly the coffee company has implemented the global supply chain, but most of them did not use the formal term of global supply chain for their coffee supply. Actually the coffee industry, like other types of industries cannot function effectively without a supply chain. For coffee, the chain is usually complicated and differs from country to country but in general it includes: growers, intermediaries, processors, government agencies, exporters, dealers/brokers, roasters and retailers (Suhendra, 2008).

RESEARCH METHODOLOGY

Unit analysis in this study is organization; Companies in this study are coffee manufacturing, which have trading activities as importer or exporter. In term of distribution, companies using third party as logistics partners, such as truck is country of origin distribution and shipments for overseas distribution. The primary data will be collected through survey and interviews. Participant of interview is top management, Interview duration time is approximately a half an hour until two hours. Meanwhile, the respondent of survey method is the middle management who familiar with the coffee manufacturing process, including production manager, manager of logistics, purchasing manager, distribution supervisor. Survey will be done by enumerator (who distributed and collect questionnaire directly from the potential respondent). Second major source of data will used in the research such as: report, memos, journals, magazines, books, etc. Special attention will be given during data collection until finishing data collection. Number of companies will participate in the study are around 252 biggest coffee companies based on the list of directory members of Association of Indonesia Coffee Exporter and Industry (AICE) the participants was reduced from around 1600 coffee exporter

companies by Indonesia Government. Because of limited number of companies as participant, sample will collect directly in this study to make sure of data gathering.

SUMMARY

Globalization has restructured the business world and introduced the concept of a global supply chain which is consists of companies networking and outsourcing all over the world. In global information, enterprises more focusing on leveraging systems by using business-to-business (B2B) software products that integrated with the enterprise systems software and facilitated tighter linkages with upstream and downstream supply chain partners also become easier sharing information through electronically. Enterprise information system as a complex network system has faced many safety and security. Modern enterprises significantly depend on the timely and sustainable delivery of information, that why to focus on this challenge toward, enterprise information systems (EIS) such as enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM), manufacturing execution system (MES). Enterprise information system is a special type of information which is characteristic by a series of integrated software modules and databases are commonly used to help manage the human resources, financial, and service or manufacturing processes. Enterprise information system offers a variety of functional modules share a common database, typically, the company system is a collection of software component packages that are labeled as enterprise systems because they combine the most important functions of an organization

Whereas, a global supply chain refers essentially to the processes and activities that transform a product from its raw state until it is sold to a customer globally. Therefore, the ineffective implementation of information system in Indonesia impacts adversely on the coffee industry in the early stages of the global supply chain. With regards to global operations in coffee industry, an enterprise information system is required for the integration of extended enterprises along the supply chain with the objective of achieving flexibility and responsiveness to the customers in response to the growing global competition

. Understanding the risks generally associated with the obtained results is not as expected, several techniques and

instruments used in risk management, which consists of a forward contract, futures contract. The main problem of risk has an impact on production and sales, in fact exporters, always makes the decision to sell the commodity without making a purchase beforehand, or make a purchase before the sale transaction done, after they had done purchasing maybe facing on price declines. In other hand, in price will increase after they made the decision to perform a forward contract, this would be little risk that the benefits will be obtained or not obtained the benefit even obtained substantial losses. To take the opportunities and to seek the protection from coffee price fluctuation in both cash market and future market can be anticipate by implementing hedging concept. To improve company performance, enterprise information system is play importance role for coffee commodity in global trading, because the companies always face of financial risk in global coffee market such as price fluctuation, and currency exchange.

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