Enterprise Resource Planning - Literature review Example

? In the past decade, Enterprise Resource Planning has become one of the most valuable components of the information technology. Their critical implementation and procedures are used to facilitate rapid organization and development, minimizing the need of human interaction in every aspect of the company’s operations. Every ERP system must provide access to an effective integrated marketplace and facilitate a reliable infrastructure. Often the best practices for ERP incorporation are ignored, leading to catastrophic results and bankruptcy. Implementing the correct measures and selections will help in the correct use of ERPs and manage operations without disturbances and time lag. Taking into account all the necessary precautions described in this review, readers can develop an accurate and effective ability to choose the correct ERP to fulfil their company’s needs. Enterprise Resource Planning The development of Enterprise Resource Planning (ERP) packages has evolved the software market in the most valuable segments of modern organizations. They have transformed over the past decade, every aspect of organisational process including sales, marketing, manufacturing and staffing. The first ERP systems that emerged were very expensive for small and medium companies and also required complex processes and maintenance to incorporate them. The detrimental effect that ERPs possess over the entire organization is deemed important for the development and prosperity of a business (Livermore & Ragowsky, 2002). As, such a combination of human and technical expertise is required in order to make a correct selection of vendor, implement the system accordingly and provide adequate support and maintenance. The instances of companies going bankrupt due to implement failure of an ERP system include prestigious firms, such as Mobil Europe, Nike, Reebok and Hershey. The continuous failures of the ERP system have raised the question of their viability and the risks involved with incorporating such practices (Chen, 2001). Based on available literature and real-life examples, this review will analyse the tasks needed in order to choose the correct ERP system, the implications that need to be considered, important procedures needed for implementation and future directions for research are proposed. History of ERP The predecessors of modern ERPs were made in the 1960’s with the manufacturing of early Material Requirements Planning (MRP) software by the partnership of J.I. Case with IBM.. However these solutions were big and expensive because they required a large technical staff to support the mainframe computers. In 1970’s the development of faster and higher capacity storage enabled the development of a more integrated business information system. The introduction of COPICS concepts for IBM computers and subsequent birth of software companies such as SAP (Systemanalyse und Programmentwicklung) and Oracle among others, lead to increased technological advancements in MRPs. Its functions included scheduling and releasing manufacturing work orders and purchase orders (Chen, 2001). The MRP II system was created in the early 1980’s by J.D Edwards was later named manufacturing resource planning rather than its original acronym and adopted the MRP-II term to conjoin with the newer capabilities, such as integrating primary functions (production, marketing and finance) and personnel and engineering to improve the efficacy of the enterprise. During the late 80’s the update of CIM (Computer Integrated Manufacturing) framework offered a strategy to help integrate information in a consistent manner across the enterprise, which was the key to the migrating path between MRP and ERP systems (Chung & Snyder, 2000). The term enterprise resource planning (ERP) was named in the early 1990s by the Gartner Group and included certain criteria to asses the extent of integration across many functional areas such as production from raw materials to work-in-process (WIP) to finished goods inventory (FGI), shipping and receiving transactions among others, that were not directly reflected in the general ledger in a real-time manner but were summarized and applied in the month-end closing (Siriginidi, 2000). Gradually, as other companies such as Oracle, J.D Edwards and SAP gained power in the software market, the dominance of IBM was diminished in 1999. A major factor of the ERP growth during this period was the Y2K problem of 2000, when many small or medium size businesses (SMEs) were eager to adopt the new ERP offers to address fixes for the system software that was not Y2K compliant. Later after the 2000’s and the maturing of the industry, the cash of technology that began in 2000 caused many companies to downsize and find ways to improve product offerings and increase market share. The information technology evolution to the internet era from the client/server era forced ERP vendors to customize software to a browser/web server to improve capabilities and enter the e-business field (Chung & Snyder, 2000). Selection of an ERP system High levels of inventory, a lack of coordinated activity and poor customer response levels are a few signs that suggest the implementation of ERP software. It has been proven that adopting ERP reduces lead time by 60%, increases business; increases turn over of inventory by 30%, ensure 99% of payments done on-time and reduce work in progress to 70%. Overall, these translate to reduced quality costs, improved customer satisfaction, improved information accuracy and increased flexibility (Siriginidi, 2000). Due to the fundamental design differences of each ERP package, the selection process is a vital part before implementation. It’s consisted of essential criteria such as support infrastructure and experience as well as staff that are involved in technical specifications. Simple systems with novel tools are able to offer a consistent interface that could potentially reduce the implementation time. Research conducted for small and medium to large sized organisations in Austria analyzed the differences in the needs of the different sizes of companies (Bernroider & Koch, 2001). The analysis conducted that adaptability and flexibility of the software were more important for small organisation, as a shorter implementation can keep costs low as it’s an integral part of a small business (Van Everdingen, Van Hillegersberg, & Waarts, 2000). Flexibility, user-friendliness, functionality and quality of the products are equally important in European midsize companies as another study suggested. The basic features that can be listed for ERP selection are: Ease of use. Increased ease of use can provide efficiency and requires fewer resources. Cost. A major factor in implementation, the cost should not have a negative effect in normal organisation operations. It includes support, maintenance, hardware and infrastructure. Customization. ERP solution should provide flexibility in configuration and can accommodate various changes and new requirements without the need of reprogramming. Integration. The data should be able to be integrated between modules without affecting efficiency and accuracy. Support and security. Because of the large possibility of failure in running the ERP system, support during and after implementation should be provided. Additionally, security at a user and system level is necessary for preventing hackers as well as malicious applications. ERP Implementation Life Cycle The implementation stage of ERP involves a required number of activities that must be managed in order for a successful ERP system. It starts while choosing the appropriate software, by preparing the environment to accept the new settings Installation. While it may not be an actual part of the implementation process, installation is the basic mechanics employed when making a transition from one software package to another while minimizing any occurring problems. The first step is to create a computing environment that is able to host the ERP system, which can be hosted by the software vendor or in most cases, by the clients themselves (Austin, Nolan, & Cotteleer, 2002). However this makes them responsible for acquiring the necessary resources as well as running the system. Additionally, vendors supply clients with the requirements of the computing resources to run the ERP system, such as multiple tiers. Other operating system updates, backup systems or even increased networking capacity may be required. An instance, which is the installation of ERP software along with the necessary components is required, therefore a sandbox instance is supplied to quickly begin installation. Multiple instances may be supplied according to the client’s needs, such as in the case of multiple geographic divisions of the company. Configuration. Configuration is the process in which various settings in the ERP system are altered to validate support for customer’s business needs (Welch & Kordysh, 2007). While no changes are made in the core software code, the configuration tables are updated with settings that are specific for the client’s business needs. The configuration tools can be used by project team members in an easy to use GUI where any selections made command the software to act differently based on the selected values. These include the default currency, the recognition of revenue by product line or geographical unit and the choice of LIFO or FIFO based inventory. With over 3,000 configuration tables and 8,000 configuration decisions to be made with SAP software, software vendors ensure to provide even more configuration options to broad their customer base. However, when the current options are not able to fulfil the business requirements, supplementation of programming code is needed, in the process known as customization. Customization. This turning point in implementation is based on the choice between a standard vanilla solution or an ERP system customization (Scheer & Habermann, 2000). In vanilla implementation, only the default options of the ERP system are chosen and the best practises already built into the software. While it doesn’t necessarily differentiate them from other installations, choosing a vanilla implementation ensures under budget and on-time implementation. However, customizing ERP software often provides a competitive advantage in the business support process by fulfilling certain regulatory or legislative requirements not met by the existing software. The task needs to be performed by a specialised programmer which can be incorporated from the company or by asking assistance from the software vendor by providing unique solutions to customize and install configurable options. This is especially advantageous to the vendors as they can approach an extended customer base. Customization is divided in to two types: enhancement and modification. Enhancement is used when the customer requires an addition of a field or an extra step in the process (Brehm, Heinzl, & Markus, 2001). The software analysts must develop both functional and technical specifications, which are used to code the enhancement. This method is implemented in the user exits, specific pre-defined breaks in the programming core where custom code can be inserted without substantially altering the program’s function. Modification is needed when the software provided cannot provide the ability needed in order to fulfil the client’s requirements, therefore substantial change in the core code must be ensued (Hong & Kim, 2002). This modification is only performed after registration with the vendor and is not subject to future upgrades. However, there are some downsides when customizing ERP software. It’s a time consuming process to create custom code which can involve inherent risks and requires exhaustive testing. Due to the need of an on-time project, quality assurance and testing is done minimally which creates the risk of software which could have serious “bugs”, leading to an instable system. Additionally, each customization subtracts value from the costs that are associated with the analysis and development in the short run, and the increased need for maintenance and support. Testing. This is the final process before the deployment of the ERP system and confirms that the software functions in the manner expected and fulfils the client’s requirements. The project team fine-tunes the software configuration and refines it by identifying gaps not found before implementation and tests data definitions. This is done by examining the conversion of previous as well as the interpretation of the newly inserted codes during customization. If the testing is executed well, the operation of the software can be ensured with limited side-effects (A. Wong, Scarbrough, Chau, & Davison, 2005). A production instance can be used to run the operations, and companies test the results in a special conference room where CRP (conference room pilot) sessions are ensued to execute transactions and compare the results to the ones expected (Schliesser, 2007). System tweaking needs to be done if there are any differences between the two results. Various tests can be done in order to assess different aspects of the software which include unit testing (single development object testing), integration testing (end-to-end business processes with any customizations), customer acceptance testing (testing realistic business scenarios that represent expected live workload from the system), security testing (tests of user roles and authorizations) and performance load testing (transaction volumes and user activity testing to compare with expected results). ERP modules. The modules available in ERP packages correspond to major functional areas of an organization which include purchasing, inventory control, order tracking, financial issues, accounting, human resource and marketing. Computerized implementation of these techniques is both technically feasible and economically profitable for companies. Finance. The financial module is the most basic of many ERP systems as it can generate financial reports (trial balance, financial statements, and general ledger) by gathering data by various departments. It also has the ability to import account-related entries and calculate impact on the whole system (Chung & Snyder, 2000). Other abilities include utilisation of cash such as expenditures and income, which is helpful for managers to determine and take important financial decisions. Important financial reports such as Balance Sheet, Creditors balance, cash/bank fund position and others are covered by this module. Human resource. Another widely implemented module, it works by the streamlining of human resources and human capitals management. It includes a complete database filled with contact information, salary, attendance and evaluation of performance of all employees. By integrating knowledge management systems they can utilize every employee on the level of expertise (Shang & Seddon, 2000). Its universal database provides a link between the financial and human resource modules. Some advanced features can be used to evaluate applications “fill” application databases to present a database evaluating all applicants in compliance with the position needs.Management of the employees’ payroll data is facilitated by the module, by covering attendance, overtime and comparing time and work related efforts to provide cost analysis and efficiency metrics. Production planning. This module, which has evolved during the transition of MRP II systems to ERP, is responsible for optimizing the utilization of manufacturing components, capacity and material resources by making use of historical production data and sales forecasting. It’s designed to monitor the daily production process and dispatch of order information upon completion for delivery (Soh, Kien, & Tay-Yap, 2000). It also helps a company to utilize all available resources optimally by providing an organization plan. By taking in account details such as raw material availability and machine capacity, a production schedule can be generated for every machine based on the priorities of the production. Purchasing. This module identifies potential suppliers, negotiates price, bills processes and awards the supplier with a purchase order, while being integrated with production planning and inventory control modules. Its functions are mainly responsible for providing companies with materials at the required quantity and quality taking into account price and time-frames (Chung & Snyder, 2000). The system is able to handle order scheduling, billing, supplier evaluation and import of goods. Inventory. The inventory module is responsible for the maintenance of a required level of stock. It works by identifying requirements of the inventory, monitoring of item usage, keeping inventory balance and reporting inventory status. Its integration with finance and sales modules is able to create executive level reports. Stock-related functions that require substantial amount of time are computerised and provide rapid reports of dispatches, receipts and quality control (Shang & Seddon, 2000). Sales and marketing. The basic functions of order placement, shipping and invoicing are covered by this module. Modern ERPs offer e-commerce functions by keeping an online store as parts of sales. By handling activities for all sales and export of the company, a customer and product database is generated. It can also implement various marketing surveys to estimate the differences in demand between products in order to generate efficient decision making plans and strategy planning (Gardiner, Hanna, & LaTour, 2002). ERP Failure Case Study One of the most famous and well-known ERP implementation failures is the case with the sportswear and equipment company, Nike. The company, having expanded widely in 5 geographical regions, introduced ERP implements to improve its Supply Chain Management scheme (A. Wong, et al., 2005). The NSC project, as it was named, combined ERP, Supply Chain and CRM software on a single SAP platform. The premise of this project was to provide greater flexibility, improve services and global supply chain efficiency and reduce inventory and capital investment risk. The implementation of the i2 software in 2000 was a revolutionary program that cost $40 million and was an integral upgrade of the supply chain strategy. However, this update cost Nike over $100 million in lost sales, caused 20% in stock price depression and triggered a myriad of class-action lawsuits (Achanta, 2008). The main reason that the ERP failed was because i2 was made by a third-party vendor, was improperly customized, contained bugs while the staff wasn’t experienced enough to adequately integrate the program to the company’s needs. Critical Success Factors for ERP Implementation Although companies seem to spend millions on ERP software and implementation, the high failure rates represent the considerable problems that can occur during the actual implementation of the project. It is imperative for companies to investigate experiences from other case studies and implement their successful approach. A large body of literature which addresses the problems occurring during ERP implementation proposes critical success factors (CSFs) in order to facilitate successful implementation of ERP modules. Marsh (2000), determined the factors for success or failure for SMEs that include organizational experience of IT and deep understanding of ERP implementations, while Holland and Light (1999)developed a CSF model that included an implementation strategy as well as technical software configuration and project management variables. By comparing and evaluating various literature, Wong and Tein (2003) observed that there was a higher frequency of four basic CFs: top management commitment, business process re-engineering, change management , people management and development. Top management commitment. Management is a critical part of ERP implementations in order for IT projects to succeed, therefore a top management acts as a mediator between “the imperatives of technology and imperatives of the business” (Davenport, 1998). Case studies have noted the importance of top management in overseeing the project and participating in the carefully planning of the ERP implementation in relation to business. Fast and effective decisions are made easier, conflicts become resolved, a company-wide acceptance is promoted form the project and co-operation among the different groups of the organisation is facilitated. Business process re-engineering. ERP system implementation must be based on a re-engineered business process standard that is compliant with the system (Gibson, Holland, & Light, 1999). Companies must decide while planning between using default software settings or customize it to their needs (Holland & Light, 1999), however it has been proven that even an evolved ERP package only covers 70% of the organisational needs (Melymuka, 1998). Modifying software to meet the company’s needs is frequently risky in creating dangerous bugs and generally slowing down the project. Therefore, the best approach is to change long-established manners of business processes in order to accommodate the required software, which can often provide a competitive advantage compared to practices used by other companies (Bingi, Sharma, & Godla, 1999). Change management. One of the most important factors in new ERP system implementation is the resistance of employees to conform to the new changes or even the underestimation of the efforts in the managing change by managers (Melymuka, 1998). The complexity of the new tasks inserted by ERP systems can confer enormous changes to organizations and users, due to reluctance or difficult to understand the changing computer environment. Businesses must assess the performance of ERP on individuals and evaluate the positive or negative effects on user’s learning and effort in using the new system. Various prominent companies in the field such as HP, Barden Corp. and Microsoft suggest appropriate placement of specialized people during implementation and heavy involvement of experts from such field, to reduce resistance to changes (Gupta, 2000). People management and development. While it’s closely related to change management, some issues in people development have been shown to directly increase the success of ERP implementation by acquiring new sets of skills and expertise. During the installation of a new ERP project, training of the employees is important but often underestimated by most companies. Reducing the size of workforce and providing adequate training to increase expertise one of the solutions to overcome any technical challenges in implementation. Another solution is to hire external expertise, since many vendors provide ERP services which offer features such as end-user training, ERP maintenance and ERP implementation services (Sumner, 1999). Choosing An ERP Vendor The extensive use of ERP systems in both government and commercial institutions has made the variety of ERPs offered to be varied and specific. By comparing the market share and features of each company, it’s possible to determine the appropriate vendor for each situation. In this example, the comparison between two established companies, SAP and Oracle is made. SAP occupies a large market share as specified by surveys that were conducted for the time period between 2006 and 2012 (22%) (Panorama, 2012). SAP provides two different systems, SAP Business All-in-One and SAP Business One, the former providing industry-oriented solutions while the latter targets small to mid-sized companies up to 2,500 employees. It’s a tightly integrated system, difficult to modify and with a reputation of being expensive and complicated, therefore not so easily selected by companies. Oracle offers integrated solutions such as JD Edwards and Peoplesoft that support manufacturing industry and either use a common database for processes or target large sectors with a dedicated client-server approach and web-centric design. It is chosen easily by clients but has a smaller market share than SAP at 15%. By having a higher flexibility than other companies it can adjust to business needs but is difficult to be used in a larger organization (Kimberling, 2010). While there isn’t an absolute solution for every company, in my opinion the best choice is SAP, due to the long reputation and stability provided. While it may not provide adequate modification, the integrity and stability of the product is essential to be used for a large-scale company that requires implementation to all of its departments. While the cost of SAP is higher and requires more implementation time, a large business will be able to handle both disadvantages in order to ensure progress and minimize risk. Conclusion Implementing ERP systems in organizations is a complex process which requires preparation and expertise. Successfully using ERP software is able to affect positively every aspect of performance and functioning. However, in order to bring success and growth, certain measures need to be taken and problems need to be addressed to avoid any conflicts and bugs that can jeopardize the integrity of an organization. Research has analysed the problems and suggested solutions that have been validated with observation. However, the research is simply observational and not absolute, and the expected results may not be observed. A particular area that researchers need to focus, is the implications of employees in the acceptance of new ERP systems and evaluate the results connected to improper ERP implementation. Works Cited Read More