Comparative Study of ERP Implementation in SMEs

1 Comparative Study of ERP Implementation in SMEs: Benefits, Challenges and Life Cycle Perspectives Executive Summary Enterprise resource planning (ERP) is a system purposefully designed for business entities in order to enable them operate efficiently with very limited costs incurred. These systems are integrated into the organisation’s structure to enhance both top-down and bottom-up communication without necessarily requiring the physical presence of an individual. An organisation needs to be networked effectively and IT infrastructures such as computer terminals, printers, sound, and voice devices acquired prior to the implementation. Before any enterprise commits to adopting and integrating a particular ERP, it is important to first of all carry out an extensive analysis of what is in the market since they vary in their functionality in terms of size and capacity. It is also prudent that during the analysis phase, the company solicits for the services of an IT professional to enable it gather accurate information and advice.

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Table of Contents Executive Summary.........................................................................................................................2 Table of Contents.............................................................................................................................3 Comparative Study of ERP Implementation in SMEs: Benefits, Challenges and Life Cycle Perspectives.....................................................................................................................................4 Introduction..................................................................................................................................4 Overview......................................................................................................................................4 Benefits of ERP to SMEs................................................................................................................5 Improve efficiency.......................................................................................................................5 Standardisation of business operations........................................................................................5 Customisation of products and services......................................................................................6 Enhanced competitive advantage................................................................................................6 Challenges of ERPs in SMEs..........................................................................................................6 Limited financial resources..........................................................................................................6 Absence of skilled labour............................................................................................................7 Management’s inability to adopt new change.............................................................................7 Continuous growth requirement..................................................................................................8 Dynamic nature of technology.....................................................................................................8 Compatibility with associate’s system.........................................................................................8 Implementation of ERPs in SMEs...................................................................................................9 Big bang implementation strategy...............................................................................................9 Phased rollout..............................................................................................................................9 Phased rollout by module........................................................................................................9 Phased rollout by departments.................................................................................................9 Phased rollout by geography.................................................................................................10 Parallel adoption........................................................................................................................10 ERP Interaction with Users within an Organisation......................................................................10 Findings, Implications and Future Direction.................................................................................11 Conclusion.....................................................................................................................................11 List of References..........................................................................................................................13

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Comparative Study of ERP Implementation in SMEs: Benefits, Challenges and Life Cycle Perspectives Introduction Enterprise resource planning strategies or systems are an important aspect of any corporation or entity due to the wide range of capabilities that they offer. These systems, once put into effective and maximum use, contribute a larger percentage of annual profits recorded by a majority of small and medium enterprises. Many business entities are experiencing growth mainly as a result of implementing ERPs. It achieves this through enhancing competitive advantage, providing a good platform for reengineering as well as transforming the nature and function of information systems. This report carries out an extensive analysis of the latest developments being recorded particularly in as far as SMEs implementation of ERP is concerned as well as exploring the challenges and benefits attributed to this planning.

Overview Enterprise resource planning, abbreviated as ERP, refers to techniques and concepts employed for integrated management purposes with an aim of improving enterprise efficiency.

Originally, ERPs were generally made for use by manufacturing industries, mainly aiding such areas as sales management, accounting management, together with production and control management. However, the recent years have witnessed diversification of ERP software to cover many other industries, including small market enterprises.

Many myths and misguided notions have continued to hamper the growth and performance of ERPs. For instance, managers and other players in an organisational set up still believe ERPs mean more complex work for them. The transformation needed from a traditional or manual system to an ERP still instils fears in workers and their managers as well about

4 learning new systems and putting into place complex control structures and systems. There is also a notion shared among many that ERPs means laying off workers owing to the fact that the system will perform all the functions they were in charge of. These unfounded fears together with many others out there are baseless and often are propagated by individuals who understand very little about ERP functions and role (Leon, 2007).

Benefits of ERP to SMEs Improve efficiency ERPs have helped SMEs to automate their business operations. With their numerous capabilities, ERP enables an automated workflow setup that eliminates errors and repetitive work which is costly to the enterprise. With the integration of systems within the enterprise, all the functional areas operate as one. In other words, the finance, marketing, sales and personnel functions for instance operate in unison as they all target to achieve the set objective of the enterprise. Similarly, external integration provides an opportunity for the firm to collaborate with its allied partners thus improving and maximising on relevant information exchange which eventually nurtures a healthy partner relationship management (Altekar, 2006).

Standardisation of business operations ERP systems help an organisation to achieve standardisation with ease. All the functions are automated in such a way that they can easily be viewed as operational modules. The linking of these modules forms a relationship chain that comes with it very significant benefits, both tangible and intangible, realised across the entire enterprise. Some of the tangible benefits include downsizing of employee numbers as well as inventory stock, improved production, order management and on-time deliveries which eventually means better profits. On the hand, intangible benefits include such aspects as process standardisation, enhanced opportunities of

5 globalisation, improved processes of business as well as the visibility of information supply chain (Osterle, Fleisch & Alt, 2001).

Customisation of products and services Businesses become more customer-centred as a result of ERP integration. This is helped by the fact that accurate and up to date information regarding customer’s choices and tastes is readily accessed at the company’s internal database. Feedback information from customers is particularly channelled through a well laid mechanism and is thoroughly analysed by the relevant staff before deducing a corrective solution that addresses customer one hand and the company products and or services on the other which is important for growth in terms of business.

Enhanced competitive advantage The main objective of any business organisation is to have a lean performance where profits are maximised. This requires the building of a competitive edge in order to command a big market share in comparison to other players in the same industry. ERP sufficiently addresses this need because it eventually cuts down on the operation costs. This is done through maintaining lean inventory and efficiently managing a just-in-time management. Keeping huge inventory and having an irregular supply is costly to any organisation and affects quality (Hamilton, 2003).

Challenges of ERPs in SMEs Limited financial resources IT applications are generally expensive to acquire, particularly for small enterprises whose financial capabilities may not be comparable to those of established firms. Implementing an ERP infrastructure requires the acquisition of computer processors, installation of networks, both internal and external, presence of computer peripheries like printers, bar code readers, as

6 well as a substantial length of cables to be laid in and around an enterprise’s office buildings and compounds. Acquiring all the necessary equipment to enable an efficient implementation of an ERP is thus an expensive venture that most SMEs would rather avoid than commit the little funds available to. Depending on the nature of business that an SME is involved in, sometimes the implementation costs could mean investing 5-year or 10-year profits to this single venture which, on most occasions, would not be considered viable at all (Monk & Wagner, 2008).

Absence of skilled labour ERPs cannot be efficiently handled by any other person unless those charged with that responsibility have acquired the necessary skills. This is a challenge to most SMEs because they don’t employ IT personnel given the nature of their business. It would mean an SME is forced to hire workers with IT training, either on permanent or contract basis, in order for them to assist the company to efficiently manage its ERP strategy. This is an expensive venture since IT professionals are expensive to maintain.

Management’s inability to adopt new change For an ERP to be able to provide anticipated results, a restructuring of the enterprise’s structure needs to be carried out. The traditional system that was in use prior to the integration of the ERP needs to be revised and necessary changes adopted to accommodate the new system.

This means old procedures could be done away with and new methods employed. However, the challenge could be on the side of managers who might be curtailed by their own limited skills to implement a successful transformation. Such a project would thus face hurdles because managers often provide leadership and are expected to coordinate the entire work.

7 Continuous growth requirement Small market enterprises generally are entities considered to be growing due to their expanding business ventures. They strive to record substantial growth every financial year and often achieve it. It is, however, challenging for such an entity to choose on the most appropriate ERP that would suit its activities given the nature of its growth. ERPs are designed to serve different sizes of organisations and will be less effective if it is used on an organisation that does not conform within its limits.

Dynamic nature of technology Technology is a highly dynamic field that continues to witness new inventions after every short period of time. New inventions are often an improvement of the previous version, meaning they have better results in terms of performance. Such system upgrades become compulsory particularly when the old software is replaced from the market, requiring that users conform to it.

This is a bit expensive for small and medium enterprises to achieve because it may require an overhaul of the previous project. Additionally, managers and users will require fresh training on the new system, which is costly and time consuming. All these factors jeopardise the willingness of SMEs to implement ERP. Compatibility with associate’s system In the business world, companies look for business associates that will help them achieve mutual benefits in terms of improved profits. Such business associates could be in the form of distributors, suppliers or even client companies with their own installed ERP systems. It may thus require that an SME dealing with such an entity integrates its system with that of the associate company for easy operation. This may call for a total overhaul of the existing system which might be incompatible with what the associate has. If the associate is a big firm, it probably would mean that the system they have installed at their premises is big, complex and

8 expensive. This is a challenge to the SME as raising the necessary funds required to acquire a matching system could be beyond its financial capabilities (Sankar & Rau, 2006).

Implementation of ERPs in SMEs Different strategies for the implementation of ERPs in an enterprise exist. These strategies employ slightly differing methods but the eventual result is the same.

Big bang implementation strategy This kind of implementation occurs in a single but major event. Necessary modules required for the implementation are installed throughout the organisation all at once and the transfer of systems is executed. Although this strategy appears to lack a pre-plan, many preparations actually take place before the switching happens. Fall-back scenarios are also deduced in advance to cover any failures that may occur during the changeover.

Phased rollout This strategy employs changes that happen in distinct stages that compliment each other.

The transformation process from the legacy system occurs in series of well predetermined steps.

Three general ways of implementing phased rollout exist. These are as follows: Phased rollout by module In this strategy, the implementation of ERP modules is done one after the other but starting off with the core functions of the enterprise that are carried out on a daily basis. As the implementation continues, more functionality is added till a full integration is achieved.

Phased rollout by departments Implementation takes place in either one or several departments of the enterprise at a time. The rollout continues until the entire organisation is covered by the new ERP system as is

9 intended. Reasons for choosing this strategy could be varied, ranging from the costs involved to the complex nature of organisation’s structure.

Phased rollout by geography This strategy covers implementation of ERP system at a time according to locations or branches of an enterprise that could be far flung. This is a rare strategy for use by SMEs but could still apply particularly for SMEs with branch offices.

Parallel adoption This plan of implementation involves running both the newly adopted ERP the old one concurrently. Its main objective is to enable users acquaint themselves with the new system being established while at the same time performing normally with the old one (Leon, 2007).

ERP Interaction with Users within an Organisation The strategic level of any organisation is one that is made up of senior management that include the managing director, chief executive, or company chairman. This kind of managers basically provide the long term and middle term objectives of the firm and may sometimes offer a strategy through which such objectives can be realised. As a result, their interaction with the ERP system is for top-down communication purposes where they declare the objectives of the firm.

The managers occupy the decision level of the firm where they plan on how to effectively execute the strategic objectives as received from the company director. After designing an execution plan, the managers use ERP system to communicate the information down to the operational level and also give feedback information to the top management on the extent of their planning.

10 Execution agents or simply workers occupy the operational level of the organisation.

They receive simplified plans and instructions on what to do in order to achieve the targets from their managers. They also communicate back to their managers, identifying difficulties and reporting on general performance (Xu, Tjoa & Chaudhry, 2007).

Findings, Implications and Future Direction ERPs are an integral part for the successful operation of SMEs because these systems enable the enterprise to achieve efficiency in their operations and also achieve competitive advantage. Although the benefits of ERP implementation are enormous, SMEs are facing a huge challenge in as far as the implementation is concerned. It is an expensive venture whose adoption may consume the entire funds of the organisation. However, the contemporary situation is that most organisations are implementing its adoption and efficiently managing it to get maximum results.

Conclusion ERP manufacturers have come up with versions that can be adopted by small market enterprises for use in their daily operations. Previously, ERPs only targeted big firms that coughed a lot of money to acquire ERP systems. These systems once fully and properly integrated, help the organisation to operate in a lean manner where operation costs are maintained at the lowest possible level while enabling the maximisation of profits. However, proper planning and training of users together with the managers is needed if at all better results are expected. A number of challenges also exist which hamper and discourage many SMEs from adopting and implementing ERP systems. They range from lack of expertise and skill, limited funds, constant changing IT inventions as well as presence of incompatible systems and constant

11 growth in size and capacity of SMEs. All these factors need a lot of funds to sustain which most SMEs find a bit challenging

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List of References Altekar, R. V., 2006. Enterprisewide resource planning: Theory and practise. New Delhi: PHI Learning Hamilton, S., 2003. Maximizing your ERP system: a practical guide for managers. New York, NY: McGraw-Hill Professional.

Leaon, A., 2007. ERP demystified, 2/E. New Delhi: Tata McGraw-Hill Education Leon, A., 2007. Enterprise resource planning, second edition. New Delhi: Tata McGraw-Hill Education Monk. E. F. & Wagner, B. J., 2008. Concepts in enterprise resource planning, third edition.

Boston, MA: CengageBrain.com Osterle, H., Fleisch, E. & Alt, R., 2001. Business networking: Shaping collaboration between enterprises. New York, NY: Springer Sankar, C. S. & Rau, K., 2006. Implementation strategies for SAP R/3 in a multinational organization. Hershey, PA: Idea Group Inc Xu, L., Tjoa, A. M. & Chaudhry, S. S., 2007. Research and practical issues of enterprise information systems II. New York, NY: Springer.