The Emergence Of Enterprise Resource Planning Systems Information Technology Essay

The Emergence Of Enterprise Resource Planning Systems Information Technology Essay Many organizations have initiated Enterprise Resource Planning systems, using such packages as SAP, Peoplesoft and Oracle. The ERP market is one of the fastest growing in the software industry. In a research conducted by APICS, 34.5% of the companies with revenues over $1 billion planned to purchase or upgrade in ERP system. This research is relevant to indicate that the ERP market may reach $ 1 trillion by the year 2010 (Umble et al., 2005). Enterprise resource planning systems are a major investment. Companies have invested hundreds of millions of dollars in ERP software. Its implementation promotes a variety of business justifications which include replacement of numerous legacy systems, reduction in cycle time from order to delivery, and reduction in operating costs. Also, the on-line, real-time operational data that ERP systems enable managers to make better decisions and improve responsiveness to customer needs (Gyampah, 2004). There is evidence that organizations are satisfied with ERP. Based upon a sample of 117 firms in 17 countries, the Conference Board reports that 34% of the organizations were satisfied with ERP, 58% were somewhat satisfied, 7% were somewhat unsatisfied, and only 1% were unsatisfied (Al-Mashari, M., Zairi, M., 2009). Organizations have a business justification for implementing ERP systems. The business benefits of ERP include improved accessibility of information, real time access to data across the organization, improved cycle time for orders, decreased financial closing time, reduced operating costs, and lowered inventory levels. In addition ERP systems provide an opportunity to re-align business processes with best practices and to integrate enterprise-wide information supporting financial, human resources, manufacturing, sales and marketing functions. Evolution of ERP It was in the Sixties that the concept of resource planning was first introduced by software packages that dealt with inventory control capability. Material Requirements Planning (MRP) systems were later introduced in 1970s and these contained a master production schedule and a bill of materials file with list of materials needed to produce each item. MRP systems were enhanced by adding tools for sales planning, customer order processing and capacity planning that provided input production scheduling, known as closed loop MRP. In the 1980s, MRPII systems incorporated financial accounting system along with manufacturing and materials management systems. MRPII led to an integrated business system that was used to create a database of material and capacity requirements for production and this system then translated these requirements into financial information. By 1990s ERP systems provided seamless integration of all information flows in the company- Financial Accounting, Human Resources, Supply Chain Management and Customer Information (Rondeau Litteral, 2001). Challenges of ERP System ERP system projects involve considerable time and cost not only in terms of investment but also for realization of benefits from their implementation. Research by Standish Group illustrates that 90% of ERP projects are late over budget. Meta Group survey data, based on 63 companies, showed that average implementation cost of ERP was $ 10.6 million and took 23 months to complete (K. Siau, 2004). A successful implementation of ERP requires a multi-stage approach (Jones M. and Price L., 2004), and the benefits of ERP may not occur until later stages. Jones et al., propose three stages: the project phase, the shakedown phase, and onward and upward phase. ERP software is introduced during project phase and is implemented into firms operations during shakedown phase. It is not until onward and upward phase, during which ERP modules are successfully integrated with operations, that the organization can achieve actual business results, such as inventory reduction (Motwani et al., 2002). However, Spathis et al. identify four phases for implementation of the same. The phases are: a planning phase, a re-engineering phase, a design phase, and a configuration and testing phase (Spathis et al., 2003). They indicate that re-engineering business practices around the ERP software is critical to successful implementation. In their stage analysis, Rondeau et al. (2001) suggest benefits of ERP occur when ERP modules are implemented successfully and when organizations can use the ERP foundation to add advance modules such as customer relationship management. A company has to make sure that its ERP investment fetches increased profitability. The key challenge is not in managing technology, but in managing people. An ERP system changes the way people work, and for the system to be effective, the change must be dramatic. It promotes efficient business processes with the requirement of fewer people than before ERP implementation or up-gradation. This implies that some employees will be asked either to change their day-to-day activities or their services would no longer be needed. Managing human behavior aspects of organizational change also known as organizational change management (OCM) cannot be underestimated in importance of this part of the implementation process. One of the keys to managing OCM is to realize that people tend to defy changes associated with their work related activities. If the ERP implementation is a project that is being forced on the employees, then they will instinctively resist it. However, if it is viewed as a chance to make the company more efficient and effective by improving business process, and consequently these process improvements will make the company more profitable and ensure job security to employees, then there is a greater likelihood that the employees will wholeheartedly support the implementation efforts. The best way to improve a business process is to delegate the task to develop process improvement ideas to people who are most familiar with the process using their experience and creativity. Sometimes, a company is not ready for ERP. In many cases, ERP implementation difficulties result when management does not fully understand its current business processes and cannot make implementation decisions in time . In order to obtain benefits from an ERP system resulting in reduction of costs needs an organization to streamline its business processes. However, if a company is not prepared to change its business process es, it will find a large bill for software and consulting fees with no improvement in organizational performance. ERP packages imply, by their design, a way of doing business, and they require users to follow that way of doing business. Some of business operations, and some segments of its operations, may not match the constraints inherent in ERP. Therefore, it is imperative for a business to analyze its business strategy, organization, culture and operations before choosing an ERP approach. Review of Literature Companies implement Enterprise Resource Planning (ERP) systems in order to achieve better responsiveness to the needs of customers through real-time information provided by the system, to link customers and suppliers into a complete supply chain, to provide high degree of cross functional integration, to reduce the costs and to provide the foundation for effective e-commerce (Vollmann et al., 2005). The pressure to survive in the new world order and align with the new paradigm for organizational success, namely, speed, flexibility, integration and innovation, further drives organizations towards adopting integrative software approaches like ERP. It is also a well known fact that information technology affects the organization structure (Bhattacherjee, 2000). Hence, ERP implementation would impact the structure, but this impact has not been elaborately investigated. It is often supposed that IT creates a flatter structure (Stevens, 1998). The flat structure speeds up decision-making p rocess, shortens lines of communication and aids in savings (Klein, 2001). ERP implementation benefits are not realized quickly as expected and the process is lengthy and expensive (Siau, 2004). Many organizations world over and particularly in the fast developing countries are traditional hierarchies and managing changes in structure offering challenges. As ERP implementation is an enterprise wide venture of change.It is important to understand how to manage impact on the organization structure. Two research objectives were central to this research project. ERP implementation influences the structure of the organization. Management of the change to the new structure. This paper is an attempt to examine the ERP implementation experience in a company. It drew on Organization Theory and Change Management theory to understand the transition between structures and to provide the explanations (Amoako-Gyampah, 2004). ERP represents a comprehensive software approach and information technology effects on the organization structure (Kurup, 2004) and ERP implementation success involves change management of techniques, the change management theory (Paton and McCalman, 2004) prove useful in explaining the outcomes of the case study . IT and Organization Structure The organization structure defines how the tasks are to be allocated, who reports to whom and the formal coordinating mechanisms and interaction patters that will be followed (Robbin, 1990). Organization structure has three components: Complexity, Formalization and Centralization. These components are described below and impact of IT on these components is expressed and applied to case analysis to aid in investigation of the influence of ERP on organization structure. Complexity Complexity refers to the degree of differentiation that exists within an organization. This includes the degree of specialization or division of labour, the number of levels in the organizations hierarchy, and the extent to which the organizations units are dispersed geographically (Klein, 2001). With introduction of this component of organization structure, it is possible to have wider span of control with more knowledgeable and empowered employees. Companies with IT can reduce the middle management layers and widen span of control and thereby flatten the organization structure. However, removing layers might create new challenges. New mechanisms for coordination might be needed or new process of governance might be necessary. According to the model proposed by Klein (2001), IT results in wider spans of control, fewer levels, fewer people, easier collaboration and communication. In other words, IT lowers the complexity. Formalization Formalization refers to the degree to which an organization relies on rules and procedures to direct behavior of employees. Evidence exists to indicate that developing detailed guidelines of appropriate operating procedures enhances coordination and is suitable in a stable environment (Martin, 2009). Formalization, however, is negatively associated with adoption and implementation of innovation in organizations (Ahadi, 2004) and hence it is negatively related to the ERP implementation because it tends to boast deleterious effects on the work attitudes. Centralization The decisional control in organization could be centralized or decentralized. In traditional hierarchies the decisional control is usually centralized. Research indicates that IT tends to make the decisional control more decentralized with no commensurate loss of control by the top management (Robbin, 1990). It is possible that the centralization component is related to the size of middle management although there are conflicting findings. IT results in a decrease in the size of the middle management workforce in organizations with centralized decision authority and with an increase in the number of middle managers in organizations where the authority is decentralized. Change Management The change management when linked to ERP implementation has been more focused on process change (Davison, 2002). The other type of change namely organizational restructuring provides specifics related to moving from one structure to another. The objective of restructuring is based on the companys long-range plan and the intention is to set up a structure that enables a company to be ready for new activities. However, changing an organizations structure can be difficult and successful restructuring depends on three conditions: sound planning, effective leadership and organizational commitment (Witzel, 2002). To examine organizational change in a traditional hierarchical organization, consideration is given to: Human element and informal organization. Necessity of strong management actions and inspirational vision. Sustainability of an initiative. None of available models considers all the three aspects. Informal Organization INPUT Strategy Formal OUTPUT Resources, Organization Individual Environment team, Performance Managing Change Transformation Process Figure -1 In traditional organizations, manager had to solve problems by directly communicating with the employees and was related to power and values. However, in ERP implementation much of the learning process comes from hands on use under normal operating conditions after the implementation period is over. Thus power is then transfered to individuals who are able to operate the ERP system better and utilize Work People the system resources efficiently (Aladwani, 2009). ERP affect on nature of work and training is an important part of change management practices. ERP requires users to understand that they are no longer working in isolation, and whatever they do now impacts someone else. This can create resistance that comes from a fear of the unknown and from the need of stability. There are two fundamental sources of resistance to innovations like ERP: perceived Risk and Habit. The habit of keeping the routine practices prevalent in hierarchies has to be tackled using appropriate strategies. Spathis and Constantinides (2003) have proposed a planned change model and this model assumes that change can be defined and moved in a planned way. Unlike other planning models, the four phases suggested in this model are linear and irreversible. This model satisfies the requirement of well-controlled change and strong management actions. Four phases that have been suggested are: Exploration, Planning, Action and Integration. Implementation of ERP Information technology leads to a tremendous impact on productivity of both manufacturing and service organizations. Companies have implemented systems such as enterprise resource planning (ERP), MRP, EDI, over time for improving their productivity. ERP systems have received attention lately due to more effective decision-making capability. Many companies are implementing ERP as a means to reducing operating costs, increasing productivity and improving customer services (Martin, 2009; Pliskin and Zarotski, 2000). ERP system can cripple a company, if not implemented properly. There are horror stories concerning implementations gone astray (Laughlin, 1999; Bancroft et al., 1998). Implementing ERP system successfully calls for strong leadership, a clear implementation plan, and a constant watch on the budget (Wagle, 2008). From a project managers point of view, most important consideration is a clear implementation plan and a strategy, that should evolve through systematic consideration of companys requirements and its ability to manage changes called for under new circumstances. Some of the factors to be considered seriously at planning stage are: Information needs at the operational and managerial level for various functional areas. Feasibility of ERP system integration with the existing information systems Schedule for adaptation of the new system. An organization requires development of an implementation strategy. Such a strategy, will determine how the related changes can be successfully absorbed at various parts of the organization. It has been found that the organizations that had no SAP implementation strategic plan performed poorly compared to those who had a plan. ERP implementation from countries around the world demonstrates that success is essentially conditional on adequately managing complex context of the implementation, which necessitates change management across various key areas related to business processes, IT structure, and management systems (Al-Mashari and Zairi, 2009). This highlights practical issues associated with the implementation of ERP systems. For successful implementation three basic requirements are to be met: a clear business objective, comprehension of the nature of changes and understanding of the project risk. Strong leadership and constant watch on budget are the two other, yet equally significant requirements, as stressed by Wagle (2008). For an effective implementation of ERP system, particularly SAP R/3, an organization must take a holistic view of the process (Al-Mashari and Zairi, 2009). Various issues at strategic, managerial, and operational levels should be addressed in order to achieve optimum outcomes from an ERP system. For a successful outcome an organization must establish competencies in four core areas: Change Strategy development and deployment, Enterprise-wide Project Management, BPR integration with IT, and technical aspects of ERP installation. These competencies will enable managers to effectively manage changes and direct the organization to desired goals (see Fig.2). Fig. 2. Core competencies in effective implementation of ERP (adopted from Al-Mashari and Zairi 2009). Change management Strategy Changes in an organization are brought about through implementation of strategies. Kuruppuarachchi et al. (2002) examined the success (and failure) factors and implementation methodologies that contribute to change management strategy formulation in organizations. Fig. 3 presents a framework of the change management process, incorporating change agents and strategic considerations at various stages of ERP implementation, when viewed from an IT project implementation point of view. Meyers et al. (2009) analyzed about 130 research papers to find out factors influencing the implementation of new technologies for improved operational efficiencies. They classified implementation success factors as buyers characteristics, seller characteristics, buyer-seller interface, and environment. These factors are listed below: Human resources: greater education and training among personnel; positive motivation, attitudes, and commitment toward the innovation. Structure: an adaptive and flexible structure; strong communications mechanism and net work across structural boundaries. Decision processes: broad strategic, as opposed to narrowly and earlier involvement of technical goals; greater and earlier involvement of the operational workforce; top management support and commitment and the presence of a champion; cooperation among units; slow, gradual radical incorporation of the innovation. Technology fit: familiarity with the new technology and availability of relevant skills within the organization. Higher level of technical capabilities of the seller. Strong communications skills of the seller. Expertise in project management of the seller. Constructive cooperation between buyer and seller in implementation. Knowledge transfer: the buyer is involved in leaning, diagnosing, and shaping usage patterns of the buyer. Intensive networking within and across industries leading to greater exposure to innovations. Fig.3. Change management considerations (Source: Kuruppuarachchi et al., 2002). Case Study -I Pantaloon: ERP in Retail More than eight years after it forayed into the retail business, Pantaloon Retail decided to implement SAP to keep itself competitive in the rapidly growing Indian retail market. Store operations have never been as important to retailers as they were then. Successful retailers are those who know that the battle for customers is only won at the frontline, which in the case of a retail chain is at its stores. Pantaloon was regularly opening stores in metros and there was an urgent need for a reliable enterprise wide application to help run its business effectively. The basic need was to have a robust transaction management system and an enterprise wide platform to run the operations, says Rakesh Biyani, Director, Pantaloon. The Solution The company was looking for a solution that would bring all its businesses and processes together. After a comprehensive evaluation of different options and software companies, the management at Pantaloon decided to go in for SAP. Some of the qualities of SAP retail solutions are that it supports product development, which includes ideation, trend analysis, and collaboration with partners in the supply chain; sourcing and procurement, which involves working with manufacturers to fulfill order according to strategic merchandising plans and optimize cost, quality, and speed-variables that must be weighted differently as business needs, buying plans, and market demand patterns change; managing the supply chain, which involves handling the logistics of moving finished good from the source into stores and overseeing global trade and procurement requirements; selling goods across a variety of channels to customers, which requires marketing and brand management; managing mark-downs and capt uring customer reactions, analyzing data, and using it to optimize the next phase of the design process. In a Nutshell Aim To deploy a robust transaction management system and an enterprise wide platform to run its operations. Solution SAP retail solution Implemented by SAP team with the help of Novasoft, Singapore Number of users Around 1,200 Time taken About six months Cost of implementation A $ 10 million Implementation The implementation was outsourced to a third party. The implementation was done by the SAP team with help of Novasoft which is based at Singapore, says Core Team Member. This project was headed by Pantaloons Chief Information Technology Officer, Chinar Deshpande. Some people from Pantaloon assisted in the project and twenty four qualified people worked on the SAP implementation. Three Phases SAP implementation in Pantaloon was not a single phase process. The project was divided into three phases. The first phase of implementation involved blueprinting of existing processes and mapping them to the desired state. In this phase, the entire project team worked on current processes within Pantaloon Retail. The various existing processes were thoroughly analyzed and drafted. This blueprint was later used in the formation of new states of the solution. Since the SAP would combine all the processes, each and every one of these had to be evaluated. In the second phase, the SAP platform was developed with the help of Novasofts template which was predefined by SAP after evaluation of Pantaloons needs and expertise in retail solutions. The last phase in this project was for stores to switch over to the new system and for current data to be ported. Before the SAP implementation, all the data was unorganized. This data had to be migrated to the new SAP application. The project was flagged off on 15th June 2005 and took about six months to finish. It went live at the head office on 1st January 2006. The Pantaloon Retail stores used SAP from 1st January 2006 to 30th June 2006. Benefits and Challenges The key challenges in this project were not in the implementation. Rather, the difficulties were faced during the data migration and in managing the interim period when the project was underway for about six months. Migrating unorganized data to an organized format was a challenging task. SAP General Ledger gives Pantaloon a higher level of transparency into individual operations and helps it continually drive productivity improvements across the enterprise. For example, Pantaloon can now automatically split accounting line items per document for each company profit center. These transactions are handled by the software,and the company no longer needs to make period adjustments to balance sheet and profit and loss statements. With the document splitting tool, Pantaloon now has a real-time, complete picture of its accounts receivables and payables across all operational levels, which has enabled it to reduce receivables by up to 10%. In addition, it is now able to close the monthly books 20% faster, due to tight integration between financials and controlling components and real-time reconciliation capabilities. The application is currently being used by around 1,200 employees across the organization. For maintaining this implementation and its related applications, Pantaloon has an in-house team and it has outsourced ABAP resources. ERP system relied greatly on this in-house team for training its employees (at every level) and extracting benefits from ERP. The system runs on a HP Superdome server on HP UNIX 11 and the database is from Oracle. The cost of this project was about $ 10 million. Future projects After the successful implementation of SAP for its retail chain, Pantaloon plans to go ahead with IT projects such as implementation of WMS with RFID, Customer Intelligence and CRM. Inventory and Promotions Optimization are being pursued. Case Study II Ace Designers Ltd. ERP reduces manufacturing costs by 20% for Industrial Equipment manufacturer Overview Since 1987, Ace Designers Limited, Indias manufacturer of CNC lathes and auto lathes, has been exporting machines around the world, including Brazil, Germany, United Kingdom and the United States. With growth, their largely manual systems started breaking down. They had no centralized purchasing department and means of sharing information, so company groups were paying different amounts for the same parts from the same vendor. Delivery dates were missed because of a lack of inventory control, and top management had little visibility to manufacturing process. The Challenge Ace needed a complete information system built around an ERP solution that would help manage every aspect of their manufacturing process-from purchasing and inventory to manufacturing, planning and preparing for ISO certification. The Solution Ace commissioned a comprehensive survey of the ERP market and Intuitive was selected for four major reasons: A 100 percent Microsoft platform, an easy-to-use graphical interface, excellent support, and scalable open architecture features that permitted the addition of users at any time. The consultants who evaluated Intuitive ERP and its competitors for ACE Designers concluded: Intuitive ERP is easy to install, interface, customize and maintain. It can be integrated seamlessly into any manufacturing environment and has a good scheduling flexibility and versatile options. It also has a definite ISO 9000 facilitation orientation. Ace Designers Results Ace started module wise implementation of Intuitive ERP in four phases, which were completed in four months. Intuitive ERPs graphical interface and integration with Microsoft Office and Access made it easy for Aces staff, which prior to this had virtually no computer experience, to learn and use the new system. And using Microsoft SQL Server as the database engine delivered speed and robustness necessary for their mission critical applications. Hence, employees support was a crucial factor that added to achievement of success in ERP implementation in the organization. We transformed the company from a practically nil computer culture to a total computerized system, said V. Chandra, General Manager of Ace. The learning curve for Intuitive ERP is reduced to well below that of other manufacturing systems because of graphical and interactive flow charts and complete context sensitive online help. Implementing Intuitive ERP led to dramatic improvements in every operational area: Managers now have the most current inventory and costing models available to them at all times, and they can set competitive pricing that ensures profitability. They are able to monitor online status of work orders for components, sub-assemblies and final assemblies. Improved Planning: With the previous manual planning system, it was difficult to coordinate customer requirements and design changes with production and assembly functions to meet the manufacturing schedule. Now there is seamless coordination between all departments while significantly reducing planning headcount. Prior to Intuitive ERP, there had been virtually no inventory management at Ace; information on non-moving or slow-moving items and stock values was not available. With new tools in place, manufacturing inventory has been reduced by 20 percent. With reports such as Purchase Price Variance, there is visibility of the cost of every purchased item. This has resulted in better price negotiation with suppliers resulting in a 20 percent price reduction. Intuitive ERP provides accurate data for making manufacturing decisions through reports that include online machine utilization, online work order status monitoring, online WIP components costing, online WIP sub-assembly costing and online labor utilization. Case Study III ERP Implementation Failure at HP Stanford engineers Bill Hewlett and David Packard started HP in California in 1938 as an electronic instruments company. Its first product was a resistance-capacity audio oscillator, an electronic instrument used to test sound equipment. During the 1940s, HPs products rapidly gained acceptance among engineers and scientists. HPs growth was aided by heavy purchases made by US government during the Second World War. In the 1980s, HP emerged as a major player in the computer industry, offering a full range of computers from desktop machines to powerful minicomputers. This decade saw the development of successful products like the Inkjet and LaserJet printers. HP introduced its first personal computer (PC) in 1981, followed by an electronic mail system in1982. This was first major wide-area commercial network that was based on a minicomputer. HP introduced its HP 9000 computer with 32-bit super chip. HP became leader in workstations with the purchase of market leader, Apollo Computers, in 1989. In August 2004, HP announced that its revenues for the third quarter and it was identified that its Enterprise Servers and Storage (ESS) segment had gone down by 5% (amounting $ 3.4 billion) as compared to the same quarter the previous year. The company attributed this revenue shortfall mainly to the problems faced because of migration to a centralized ERP system at one of its North American divisions. The total financial impact of the failure including backlogs and lost revenue was pegged at $ 16