Effects of Enterprise Resource Planning (ERP)

Abstract

Enterprise resource planning (ERP) systems are the most ambitious, sophisticated use of information technology (IT) by businesses to date. Managers must compare the massive investments of resources and time to be committed to an ERP implementation against the significant benefits that may be derived from ERP systems in an environment in which traditional capital budgeting decision-making models may not be appropriate.

The purpose of this study is to determine if ERP implementations have brought about significant changes on large industries in India, by answering questions other studies have not answered. This study is motivated both by an appreciation of the magnitude of a company’s decision to invest in an ERP system and by the fact that other research to date contains limitations of scope or method that may reduce the reliability of reported results. Accordingly, this study examines success factors of ERP implementations.

The results of this research are significantly more reliable than results of other studies because this research examines whether the ERP systems yield substantial benefits to the firms that adopt them, and that the adoption risks do not exceed the expected value, although there is some evidence (from analysis of financial leverage) that suggests that firms do definitely perceive ERP projects to be risky. There also appears to be an optimal level of functional integration in ERP with benefits declining at some level, consistent with diseconomies of scope for very large implementations, as one would typically expect.

Introduction

1.1 Background

Information systems exist in most peoples working lives. It is now generally accepted that the information system world is one where human, social and organizational factors are as important as the technological (Avison et al. 2001).The business environment is changing dramatically and in order to stay competitive in the market, organizations must improve their business practices and procedures. Organizations within all departments and functions upgrade their capability to generate and communicate accurate and timely information. During the last decades, enterprises have focused on Information Technology (IT) and implemented various applications to automate their business processes. These applications were not developed in a coordinated way but have evolved as a result of the latest technological innovations. As a result various integration problems were caused because the applications could not co-operate and disparate IT solutions could not bind together (Thermistocleous and Irani, 2000).

Prior to the concept of ERP systems, departments within an organization (for example, the human resources (HR) department, the payroll department, and the financials department) would have their own computer systems. The HR computer system would typically contain information on the department, reporting structure, and personal details of employees. The payroll department would typically calculate and store paycheck information. The financials department would typically store financial transactions for the organization. Each system would have to rely on a set of common data to communicate with each other. For the HRIS to send salary information to the payroll system, an employee number would need to be assigned and remain static between the two systems to accurately identify an employee. The financials system was not interested in the employee-level data, but only in the payouts made by the payroll systems, such as the tax payments to various authorities, payments for employee benefits to providers, and so on. This provided complications. For instance, a person could not be paid in the payroll system without an employee number. But later ERP software, among other things, combined the data of formerly separate applications. This made the worry of keeping numbers in synchronization across multiple systems disappears. It standardized and reduced the number of software specialties required within larger organizations (Slater, 1999).

1.2 Evolution of ERP

The evolution of ERP systems was after the spectacular developments in the field of computer hardware and software systems. In 1960s many organizations designed, developed and implemented centralized computing systems, which were almost like automating their inventory control systems using inventory packages (IC). These were legacy system based on their programming languages such as COBOL, ALGOL and FORTRAN. Material requirement planning (MRP) systems were developed in 1970s, which involves many planning the product or parts requirements according to the master production schedule (Okrent & Vokurka, 2004).

Following this system a new software system called manufacturing resource planning (MRP II) was introduced in 1980s with an emphasis on optimizing manufacturing process by synchronizing the materials with production requirements. Areas like shop floor and distribution management, human resource, finance, project management and engineering comes under MRP II (Okrent & Vokurka, 2004).

ERP systems first appeared in late 1980s and in the beginning of 1990s with the power of enterprise wide inter-functional co-ordination and integration. Based on the technological foundations of MRP and MRP II, ERP systems integrate business processes including manufacturing, accounting, human resource, distribution, financial, project management, service and maintenance, transportation, accessibility, visibility and consistency across the enterprise (Okrent & Vokurka, 2004).

During 1990s ERP vendors added more modules and functions as added advantage to the core modules giving birth to the ‘’Extended ERP”. These ERP extensions include advanced planning and scheduling (APS), e-business solution such as costumer relationship management (CRM) and supply chain management (SCM) (Okrent & Vokurka, 2004).

1.3 About ERP systems

During the 1990’s, Enterprise Resource Planning (ERP) systems was introduced as “integrated suites” that included a wide range of software products supporting day-to-day business operations and decision-making. ERP serves many industries and numerous functional areas in an integrated fashion, attempting to automate operations from supply chain management, inventory control, manufacturing scheduling and production, sales support, customer relationship management, financial and cost accounting, human resources and almost any other data oriented management process. ERP systems have become increasingly prevalent over the last 10 years. Enterprise resource planning (ERP) systems are the most ambitious, sophisticated use of information technology (IT) by businesses to date. Managers must compare the massive investments of resources and time to be committed to an ERP implementation against the significant benefits that may be derived from ERP systems in an environment in which traditional capital budgeting decision-making models may not be appropriate. The license/maintenance revenue of ERP market was $17.2 billion dollars in 1998, it is expected to be $24.3 billion dollars in 2000, and ERP systems have been implemented in over 60% of multi-national firms. This market also cuts across industries – for example, two of the world’s best-known software companies, IBM and Microsoft, now run most of their business on software neither of them makes, the SAP R/3 ERP package made by SAP AG (O’Leary, 2000).

The appeal of the ERP systems is clear. While most organizations typically had software systems that performed much of the component functions of ERP, the standardized and integrated ERP software environment provides a degree of interoperable that was difficult and expensive to achieve with stand alone, custom-built systems. For example, when a salesperson enters an order in the field, the transaction can immediately flow through to other functional areas both within and external to the firm. The order might trigger an immediate change in production plans, inventory stock levels or employees’ schedules, or lead to the automated generation of invoices and credit evaluations for the customer and purchase orders from suppliers. In addition to process automation, the ability of ERP systems to disseminate timely and accurate information also enables improved managerial and worker decision-making. Managers can make decisions based on current data, while individual workers can have greater access to information, enabling increasing delegation of authority for production decisions as well as improved communications to customers (O’Leary, 2000).

1.4 Model layer of ERP

A Global Business Process Model is created which represents the whole ERP software product. This model is layered in 3 deeper levels.

• The first level is the System Configuration Level, which scopes on high-level option on the entire system. Option definition is therefore static: once a high-level option of the ERP system is chosen to be used within the organization, the choice cannot be made changed.

• One level deeper is the Object Level, which scopes on single data objects. The option on this level is more dynamic.

The lowest level is the Occurrence level, which analyses single process occurrences. Because this level elaborates on object parameters, the option is very dynamic, meaning that options can easily be altered (Garg and venkitakrishnan, 2006).

1.5 Case study

We systematically study the productivity and business performance effects of ERP using a unique dataset on firms that have purchased licenses for the SAP R/3 system, the most widely adopted ERP package. In the last 30 years, SAP has become the global leader in business software, serving more than 38,000 customers worldwide, including organizations of every size and type. Along the way, SAP has accumulated a unique knowledge base of best practices in more than 25 industries. The SAP tradition of leadership continues with a new generation of ERP software that gives the company unprecedented speed and flexibility to improve your bottom line by improving your enterprise resource planning (Web-1). Our goal is to better understand the economics of ERP implementations specifically, and more broadly, contribute to the understanding of the benefits of large-scale Industries in India.

The author has tried to find out the success of ERP (Enterprise Resource Planning) implementation and the return on investment depends, among other factors, on the active project management team. This success and return on investment is very important to the organization since implementation cost is very high and the resulting Information Technology platform needs to supply significantly to the organization’s business strategy and survival. Since competitors are likely to be implementing ERP solutions at the same time, there is the added advantage to gain a benefit, a boundary. How is this achieved?

According to the research the organizations that have successfully implemented the ERP systems are gathering the benefits of having integrating working environment, standardized process and operational benefits. There have been many disgusting stories of improper ERP implementation because of which many companies have become bankrupt and in many cases organizations have decided to discard the ERP implementation projects. Not all ERP implementations have been successful. Majority of these studies have used case studies to conclude their findings and very few have used the experiential study of the ERP implementation process and its success.

The difficulties and high failure rate in implementing ERP systems have been widely cited in the literature (Davenport, 1998), but research on critical success factors in ERP implementation is rare and sectioned. Till now, only a few organizations have done a little to imagine the important predictors for initial and ongoing ERP implementation success (Brown and Vessey, 1999). This research is an effort to achieve that. It identifies the critical success factors in ERP implementation, categorizes them into the respective phases in the ERP life cycle model and discusses the importance of these factors in ERP implementation (Markus and Tanis, 2000).

1.6 Aims and objectives:

This research is an attempt to broaden the ERP implementation research by defining the theoretical areas built and operational measures specific to ERP implementation and success measure to advance ERP research.

1.6.1 Aim

The main aim of this research is to study and analyze the impact of implementing ERP solutions on large industries in India.

1.6.2 Objective

The objective of this dissertation is to:

• Study about the Enterprise Resource Planning (ERP) systems and their business aspects.

• Analysing the implementation process of ERP systems and their Life cycle.

• Analysing the success and failure factors of the implementation of ERP systems.

• Analysing the pre and post implementation strategies involved in an ERP project.

• Understanding the effect of implementing ERP solutions on Indian large industries.

• Understanding the success factors of the ERP implementation by doing the case study on SAP (Systems, Applications and Products).

This dissertation explains the importance of ERP implementation within an organization, primarily within the large industries and explains the issues related with the usability and the user’s opinion on an implemented ERP system. The research project discussed in this dissertation is derived from an implemented ERP system on large industries in Bangalore. The author has chosen SAP as his case study as the SAP provides the world’s best integrated solutions for the organizations. The system examined in this dissertation is the SAP implementation and the selected users for this system are the large industries in Bangalore like Bharath Heavy Electricals Limited (BHEL), Karnataka State Road Transport Commission (KSRTC), Repcol, etc.

1.7 Layout of the dissertation

Chapter 2 Literature Review – This chapter explores the literature that is relevant to the research questions on Enterprise Resource Planning systems and their implementation, Life cycle, Success factors, failure factors, the business aspects of ERP and as well as ERP solutions provided by SAP and its significance. This chapter mainly focuses on eleven critical success factors of ERP systems. This chapter will form the bases for the argument presented in proceeding chapters.

Chapter 3 Research Approach – This chapter discusses the overall review of the research approach and methods that will guide this research. This chapter also discusses about the techniques for data analysis including triangulation.

Chapter 4 Research Site – In this chapter, the site of the study and how the research was carried out (data collection) is discussed in detail. This chapter also provides the analysis of the data which was collected and an overall conclusion of the analyzed data. The particular component of the ERP system is studied and the problems being encountered.

Chapter 5 Conclusion and recommendations – This chapter outlines the conclusion of the research with the recommendations and the suggestions for future research.

Literature review

According to Garg and venkitakrishnan (2006), business environment has changed more in the last five years than it was before. Enterprises are continuously trying to improve themselves in the areas quality, time to market, costumer satisfaction, performance and profitability. The Enterprise Resource Planning (ERP) software fulfils all these needs.

2.1 Definition of ERP

Enterprise resource planning has been in defined in many ways as cited by Brown (2006) they are as follows

• Sets of business software which allows an organization for complete management of operations.(Al-Mashari, et al., 2003)

• A software infrastructure fixed with “best practices,” respectively best ways to do business based on common business practices or academic theory. (Bernroider & Koch, 2001)

• An organization-wide Information System that tightly combines all aspects of a business. It promises one database, one application, and a unified interface across the entire enterprise. (Bingi, Sharma, & Godla, 1999)

• Highly integrated enterprise-wide software package that computerize core business processes such as finance, human resources, manufacturing, and supply and distribution. (Holland & Light, 1999)

• A packaged business software system that enables a company to manage the efficient and effective use of resources by providing a total, integrated solution for the organization’s information-processing needs. (Nah, Lau, & Kuang, 2001)

• Business software that combines information across the organization. This integration removes inconsistencies and enables the organization to attain consolidated reports. (Shakir, 2000 cited by Brown, 2006)

• A combination of business management practice and technology, where Information Technology integrates and automates many of the business practices associated with the core business processes, operations, or production aspects of a company to achieve specific business objectives. (Web-8:www.sap.com)

2.2 Features of ERP systems

According to Garg and venkitakrishnan (2006) ERP system needs have the following features:

• Modular design comprising many distinct business modules such as distribution, accounting, manufacturing, financial, etc.

• Use centralized common database management system (DBMS)

• The modules are integrated and provide seamless data flow among the modules, increasing operational transparency through standard interface.

• They are generally complex systems involving high cost.

• They are flexible and offer best business practices.

• They are time-consuming and configuration setups for integrating with the company’s business information.

• The modules work in real time with online and batch processing capabilities.

• They will soon be internet enabled (Garg and venkitakrishnan, 2006).

2.3 Modules

Different ERP vendors provide ERP systems with some degree of speciality but the core modules are almost the same for all of them. Some of the core ERP modules are Human resource management, Transportation management, Manufacturing management, Accounting management, financial management, Production management, Sales and distribution management, Costumer relation management, Supply chain management and E-Business. The modules of an ERP system can either work as stand alone units or several modules can be combined together to form an integrated system. The systems are usually designed to operate under several operating platforms. SAP AG, the largest ERP vendor provides a number of modules with its famous R/3 ERP system. New modules are introduced by SAP and other vendors in response to the market and technological demand such as the internet technology (Garg and venkitakrishnan, 2006).

Koch et al. (1999) also discusses three common approaches to ERP systems implementation in organisations. As the number of modules being implemented increases, there is a shift from a big-bang to a phased approach.

• Big bang – This approach enables organizations to cast off all their legacy systems at once and implement a single ERP system across the entire organization. This is the most ambitious and difficult of approaches to ERP implementation (Koch et al., 1999).

• Franchise Strategy – This strategy, also referred to in literature as ‘phased implementation’, suits large or diverse companies that don’t share many common processes across business units. Independent ERP systems are installed in each unit, while linking common processes (Koch et al., 1999). This is the most common way of implementing ERP and it allows the systems to link together only to share the information necessary for the corporation to get a performance big picture across all the business units. “Usually these implementations begin with a demonstration or “pilot” installation in a particularly open-minded and patient business unit where the core business of the corporation will not be disrupted if something goes wrong” (Koch et al. 1999 cited by Jenine, 2001).

• Slam-dunk – With this approach, ERP dictates the process design and the focus is on just a few key business processes. This implementation strategy is most appropriate for smaller organizations (Koch et al., 1999).

ERP systems are usually highly complex, expensive, and difficult to implement. Besides the traditional MRP functionality, ERP systems include applications for many other functional areas such as Customer Relationship Management, Sales and Marketing processes, Human Resources, Accounting and Finance, Supply Chain Management, and Operational and Logistical Management. Many ERP vendors are offering some or all of these functions as options within their offering. Organizations can usually pick and choose between modules, implementing only those which are applicable to their situation (Al-Mashari et al., 2000 cited by Brown, 2006).

2.4 Functions of ERP

This software tries to combine all departments and functions across a company onto a single computer system that can serve each different department’s particular needs (Koch et al. 1999). ERP systems are nothing more than generic representations of the way a typical company which does business (Koch et al. 1999 cited by Jenine, 2001).

ERP is software, which collects data from various key business processes and stores in a single comprehensive data repository where they can be used by other parts of the business. Many organizations are now using ERP systems to solve their problems. ERP improves organizational co-ordination, efficiency and decision-making. It is a kind of software, which helps managers to find out the most and the least profitable jobs. This in turn, helps managers to eliminate the most unprofitable jobs (Zygmont, 1998). Pp 89-91.

ERP’s allow computerising the tasks involved in performing a business process so it is important that implementers start with a clear expression of the business problems being addressed (Slater 1999 cited by Jenine, 2001).

The most common reason that companies walk away from multimillion dollar ERP projects is that they discover that the software does not support one of their important business processes (Koch et al. 1999).

Not only do the business functions need to be identified, the more delicate issues such as the company’s corporate culture and management style must be examined to enable a holistic view of the implementation (Slater 1999).

ERP systems stress the importance of accountability, responsibility and communication within an organisation. They focus on optimizing the way things are done internally rather than with customers, suppliers or partners (Koch et al. 1999 cited by Jenine, 2001).

It is said that ERP is the best expression of the inseparability of business and information technology (Gupta, 2000). ERP systems highlight one specific theme: integration of all organisational processes and this has attracted many organizations to adopt ERPs in recent year (Sia, et.al. 2002 cited by Thavapragasam, 2003).

According to Gupta (2000) ERP allows companies to integrate departmental information and for many users, an ERP is a “does it all” system that performs everything from entry of sales orders to customer service. Moreover, an ERP-system enables companies to integrate data used throughout the whole organization and holds operation and logistic, procurement, sales and marketing, human resource and financial modules (Wassenaar, et al., 2002 cited by Thavapragasam, 2003).

ERPs are often known as off the shelf IT solutions that will enable organizations to achieve faster cycle fastens, reduces cost, and improved customer service (Sia, et al., 2002 cited by Thavapragasam, 2003).

Wassenaar, et al. (2002) continues to suggest that ERP-system implementation implies a much stronger organizational change that normal information system development. Problems associated with software implementations are neither new nor specific to enterprise resource planning (ERP) systems.

2.5 Impact of implementation

There is a small but growing literature on the impact of ERP systems; the majority of these studies are interviews, cases studies or a collection of case studies and industry surveys (Davenport, 1998).

McAfee (1999) studied the impact of ERP systems on self-reported company performance based on a survey of Indian implementers of SAP R/3 packages. Participating companies reported substantial performance improvement in several areas as a result of their ERP implementation, including their ability to provide information to customers, cycle times, and on-time completion rates.

2.5.1 Benefits

ERPs are designed to help manage organizational resources in an integrated manner. The primary benefits that are expected to result from their implementation are closely related to the level of integration that is promoted across functions in an enterprise. The professional literature has been proactive in determining the types of benefits that companies might anticipate from their ERP systems and to what extent organizations had actually attained those benefits on a post-implementation basis. Expectations for improved business performance after adoption may result from both operational and strategic benefits (Irving 1999; Jenson and Johnson 1999 cited by Nicolaou, 2004).

In the Benchmarking Partners study (1998), respondent companies anticipated both tangible and intangible benefits. The most significant intangible benefits related to internal integration, improved information and processes, and improved customer service, while tangible benefits related to cost efficiencies in inventory, personnel, procurement and the time needed to close books, as well as improvements in productivity, cash/order management, and overall profitability. In assessing the extent to which they had actually attained those benefits, however, on a post-implementation basis, it was evident that they were not able to improve profitability or lower personnel, inventories, or system maintenance costs as much as they had hoped. On the other hand, respondents noted better-than-expected results in overall productivity and in order-management cycle time, as well as procurement, on-time delivery, and the ability to close financial cycles (cited by Nicolaou, 2004).

Likewise, in the Conference Board study (Peterson et al. 2001 cited by Nicolaou, 2004), responding companies reported anticipating similar types of tangible and intangible benefits, although it was evident that the realization of those benefits required more time than expected.

Where as Gattiker and Goodhue (2000) group the literature of ERP benefits into four categories:

• Improve information flow across sub-units, standardization and integration facilitates communication and better coordination;

• Enabling centralization of administrative activities such as account payable and payroll;

• Reduce IS maintenance costs and increase the ability to deploy new IS functionality;

• ERP may be instrumental in moving a firm away from inefficient business processes and toward accepted best of practice processes.

The above studies on the impact of ERP systems suggest that there are potentially substantial benefits for firms that successfully implemented ERP systems (Ragowsky and Somers, 2000). We note here the significance of ERP impact has started to attract more attention from the organizations (Sarkis and Gunasekaran, 2001 cited by Hitt et. al, 2001).

2.5.2 Limitations

Limitations of ERP systems have also been widely documented; as identified below.

• ERP’s can have a negative impact on the work practices and culture of an organization (Gefen, 2000)

• There is a need for extensive technical support prior to its actual use (Gefen, 2000).

• The need for competent consulting staff to extensively customize the ERP to increase the acceptance of a new system (Gefen 2000).

• “Lack of feature-function fit” between the company’s needs and the packages available (Markus and Tanis 2000).

• It takes an average of 8 months after the new system is installed to see any benefits (Koch et al. 1999).

• The Total Cost of Ownership (TCO) of ERP, as identified by the Meta Group, includes hardware, software, professional services and internal staff costs. TCO is averaged at $15 million per system (Koch et al., 1999).

2.6 ERP lifecycle

The ERP life cycle is comprised of four phases namely analysis, installation, final preparation and go live (Robey, Ross and Boudreau, 2000). An integrative, theoretical framework was introduced which we call “integrated ERP implementation,” which is comprised of a set of theoretically important constructs. This framework has been developed based on the project life cycle approach, in which the ERP implementation project goes through different stages before it goes live.

There are number of factors that affect the ERP implementation process are termed in this study as implementation critical success factors. Upon the completion of ERP implementation project, performance is measured by a mix of outcomes (Robey, Ross and Boudreau, 2000).

Since the models are unpredictable, they cannot be measured directly, multi-item scales, each composed of a set of individual items, were needed to obtain indirect measures of each construct (Robey, Ross and Boudreau, 2000).

• Implementation planning- It is the first phase of ERP implementation in which initial implementation plan is prepared, team members are selected (which could be new or roll over from the acquisition team), project scope and initial objectives are defined. In this phase as well the implementation strategies and outcomes are identified as well.

• Installation- It is the second phase of Implementation process, activities such as hardware and network is installed according to the requirements of ERP system, configuration of ERP is conducted, system customization is performed and change management plan is executed.

• Final Preparation- In this phase data from legacy system is imported to the new system, data is converted and system testing is performed. Moreover, the users are trained on the system.

• Go Live- Going Live is the point in time in the ERP implementation, when the system is first used for actual production. In this phase, ERP system goes lives, progress is monitored and user feedback is reviewed (Robey, Ross and Boudreau, 2000).

2.7 Critical Factors of ERP implementation success

This section discusses the 11 factors that are critical to ERP implementation success (cited by Kuang, 2001).

• ERP teamwork and composition

ERP teamwork and composition is important throughout the ERP life cycle. The ERP team should consist of the best people in the organization (Bingi et al., 1999; Rosario, 2000; Wee, 2000).

Building a cross-functional team is also critical. The team should have a mix of consultants and internal staff so the internal staff can develop