ERP and its impact on business and productivity

Submitted by

MansiVaghela
Roll no. 218 Masters in Information Management (2011 2014)
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Background:
As an electronic business environment changes more rapidly under the globalization, even small and medium size companies also change their business. With enterprises becoming bigger and bigger, the legacy business systems may not be flexible enough to adapt this change and the discordance between business and information systems in their organization may occur.

ERP (Enterprise Resource Planning) is an outcome of Information Technology and is a way to integrate the data and processes of an organization into one single system, using sub-systems that include hardware, software and unified database in order to achieve integration, to store the data for various functions found throughout the organization. The term ERP used to refer about how large organizations of the industrial type planned to use organizational wide resources.

Today ERP is used in almost any type of organization it doesn't matter whether it is large, small or what industry it falls in. How do we know what software system can be considered ERP?

Enterprise systems (ES) provide businesses with opportunities that are largely unexploited. ES include ERP (Enterprise Resource Planning), CRM (Customer Relationship Management), SCM (Supply Chain Management) and E-procurement systems. During recent years, SMEs have invested considerable resources in the implementation of ERP systems as an e-business technology. ERP is a software package that attempts to integrate all departments and functions of a company into a single computer system that can serve all different departments needs. An ERP system streamlines business processes by creating an enterprise-wide transaction structure that integrates the key functions of different departments within an integrated information system platform.

ERP (Enterprise Resource Planning) is a way to integrate the data and processes of an organization into one single system. Its main goal is to integrate data and processes from all areas of the organization and unify it, to provide ease of access and an efficient work flow. ERP Systems usually accomplish this through one single database that employs multiple software modules. In India, SMEs are the backbone of the economy and are today faced with global competition. Therefore, it becomes imperative to look for means of responding to the dynamic markets. ERP systems have become the most common IT strategy for most large companies.

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Enterprise Resource Planning (ERP) software system integrates key business and management processes within and beyond a firms boundary. While the business value of ERP implementations has been extensively debated, there is large sample statistical evidence on who adopts ERP and whether the benefits of ERP implementation exceed the costs (and risks).With multi-year multi-firm ERP implementation and financial data, it is found that larger firms (and those with slightly better performance) tend to invest in ERP. Even though there is a slowdown in business performance and productivity shortly after the implementation, financial markets consistently reward the adopters with higher market valuation.

It must provide an organization with functionality for at least two systems or more. However, many of today's ERP systems can cover more than just two functions and integrate them into one unified Data Base. Human Resources, Supply Chain Management, Customer Relations Management, Financial, Manufacturing functions and Warehouse Management functions can be found on modern companies under one umbrella the ERP system. The Key to ERP is integration.

Its main goal is to integrate data and processes from all areas of the organization and unify it, to provide ease of access and an efficient work flow. ERP Systems usually accomplish this through one single database that employs multiple software modules. The ideal configuration is then to have one ERP system for an entire organization, but organizations that are very large have been known to create an ERP system and then add external interfaces for other stand-alone systems considered more powerful or able to fulfil the organization's needs in a better way. Recently the ERP vendors have developed and customized the ERP software for the use of all types of industries. This has created a great demand on the use of ERP among business entities to integrate and maximize their resources.

Through the integration of these diverse systems, organizations can gain a competitive advantage in the rapidly changing digital age. ERP is therefore a key part of the information infrastructure of modern businesses and Companies have invested considerable resources in the implementation of ERP systems.

The growing demand for ERP applications among business firms has several reasons Competitive pressures to become a low cost producer. To increase the revenue growth. Ability to compete globally. Maximizing the resources and the desire to re-engineer the business to respond to market challenges.

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The appeal of the ERP systems is clear. While most organizations typically had softwaresystems that performed much of the component functions of ERP, the standardized andintegrated ERP software environment provides a degree of interoperability that wasdifficult and expensive to achieve with standalone, custom-built systems. For example,when a salesperson enters an order in the field, the transaction can immediately flowthrough to other functional areas both within and external to the firm. The order mighttrigger an immediate change in production plans, inventory stock levels or employeesschedules, or lead to the automated generation of invoices and credit evaluations for thecustomer and purchase orders from suppliers. In addition to process automation, theability of ERP systems to disseminate timely and accurate information also enablesimproved managerial and worker decision-making. Managers can make decisions basedon current data, while individual workers can have greater access to information,enabling increasing delegation of authority for production decisions as well as improvedcommunications to customers

Evolution of ERP:
The evolution of ERP systems closely followed the spectacular developments in the field of computer hardware and software systems. During the 1960s most organizations designed, developed and

implemented centralized computing systems, mostly automating their inventory control systems using inventory control packages (IC). These were legacy systems based on programming languages such as COBOL, ALGOL and FORTRAN. (MRP) Material were

requirements

planning

systems

developed in the 1970s which involved mainly planning the product or parts requirements

according to the master production schedule. Following this route new software systems called manufacturing resources planning (MRP II) were introduced in the 1980s with an emphasis on optimizing manufacturing processes by synchronizing the materials with production requirements. MRP II included areas such as shop floor and distribution management, project management, finance, human resource and engineering. ERP systems first appeared in the late 1980s and the beginning of the 1990s with the power of enterprise-wide inter-functional coordination and integration. Based on the technological foundations of MRP and MRP II, ERP systems integrate business processes including manufacturing, distribution, accounting, financial, human resource management, project management, inventory management, service and maintenance, and transportation,
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providing accessibility, visibility and consistency across the enterprise. During the 1990s ERP vendors added more modules and functions as add-ons to the core modules giving birth to the extended ERPs. These ERP extensions include advanced planning and scheduling (APS), e-business solutions such as customer relationship management (CRM) and supply chain management (SCM).

Components of ERP:
The components of an ERP system are the common components of a Management Information System (MIS). ERP Software - Module based ERP software is the core of an ERP system. Each software module automates business activities of a functional area within an organization. Common ERP software modules include product planning, parts purchasing, inventory control, product distribution, order tracking, finance, accounting and human resources aspects of an organization. Business Processes - Business processes within an organization falls into three levels strategic planning, management control and operational control. ERP Users - The users of ERP systems are employees of the organization at all levels, from workers, supervisors, mid-level managers to executives. Hardware and Operating Systems - Many large ERP systems are UNIX based. Windows NT and Linux are other popular operating systems to run ERP software. Legacy ERP systems may use other operating systems.

The boundary of an ERP system is usually small than the boundary of the organization that implements the ERP system. In contrast, the boundary of supply chain systems and e-commerce systems extends to the organization's suppliers, distributors, partners and customers. In practice, however, many ERP implementations involve the integration of ERP with external information systems.

Implementation of ERP:
The idea behind ERP is that the software needs to communicate across functions and that ERP system permit efficient exchange of relevant data regarding the production processes and their associated
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administrative tasks. ERP system concludes five parts: material management, plan and produce, sell and design of order, financial/cost management. The whole process from customer, commercial flow, work plan, warehouse, and purchase to supplier is implemented less than 1 day based on ERP system which greatly increased the response speed and accuracy. Organizational culture affects an organizations shared beliefs, ideologies, and norms that influence organizational behaviour, and therefore plays a critical part in ERP implementing. Besides, ERP requires high computer self-efficacy among employees because organizational changes resulted by the ERP implementation require a large-scale use of computers which presents different learning process for different types of organizations. Financial accounting and control, purchasing and material management, sales management production planning and control, distribution and logistics are the Major modules of ERP implementation, selection criteria (ERP vendor, project manager and implementation partners), constitution of project team, project planning, training, infrastructure development, on-going project management, quality assurance and stabilization of ERP.

The stages of an ERP implementation and identified five stages: (1)ERP design; (2) ERP implementation; (3) ERP stabilization/resurfacing; (4) Continuous improvement; (5) Transformation.

Activities observed for the stabilization stage are typically operational optimization. During the continuous improvement stage, firms focus on implementing adding functionality such as bar coding, EDI, sales automation and generating significant operating benefits. Finally, in the transformation stage, this aims to gain increased agility, organizational visibility and customer responsiveness. ERP implementation follows six-stages or phases, viz. initiation, adoption, adaptation, acceptance, reutilization and infusion. The sixstage model and the associated issues in each of the six-stages are shown in Figure. ERP systems permit efficient exchange of relevant data regarding the production processes and their associated administrative tasks.

Major obstacles that companies faced in the ERP implementation projects such as problems in transition to new systems (data migration), unavailability of skilled people, high turnover of key project persons, cost escalations and difficulties in estimating the project requirements. The risks of ERP implementation, which involve both technical and social uncertainties, must to be effectively managed. By actively managing ERP
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implementation, managers can improve their flexibility, take appropriate action to respond to the oftenchanging ERP environment, and achieve a more successful ERP implementation.

ER P imp lem ent atio n qua lity (the tec hno logi cal asp ect) con sist ing of project management and system configuration, organizational readiness (the organizational aspect) consisting of leadership involvement and organizational fit, and external support (the environmental aspect) will positively affect the post-implementation success of ERP.

The ERP systems are both an IT innovation and also a business process reengineering (BPR) Mechanism. Hence, they enable organizations to practice new forms of industrial engineering, a shift away from the traditional forms where IT functioned independent of the business objectives. Therefore, Investment in ERP systems is an important strategy that enables businesses to achieve competitive advantages and provide good quality of service.

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Technological and Operational Drivers for ERP:

Y2K Problem or Millennium Bug: Larger companies expressed more confidence in solving the Y2K problem since they had large IT staffs whereas the small- and medium-sized companies did not have such dedicated resources and looked more at the ERP system to solve that problem. Hardware and Software Obsolescence / Technological obsolescence: Newer versions of software constantly render older versions obsolete and the hardware required by this software also changes over time. Consequently, information which relies on obsolete technologies becomes inaccessible. Companies are also facing problem with this version and incompatible problem; therefore they want a robust and long lived solution for their enterprises like ERP. Incompatible Legacy Systems: Most SMEs in the manufacturing sector even today are dependent on inflexible, cheap and standalone applications. But they are fast realizing the necessity of setting up intra- and inter-office networks, reliable IT infrastructure and the value of opting for branded ERP and software products. High data distribution cost: The lack of data interoperability among different application / technologies and between devices make high data distribution cost. These cause enterprises to go for a system which provide greater opportunities for data integration and data compatibility among different applications which share the same standards of data transfer. Integration with other application: These systems are designed to solve the fragmentation of information in large business organizations, and integrate all information flows within a company. The justification for adopting ERP centres on their business benefits, which, can be divided into technical and business. ERP systems have benefited from industries turning to technology, realizing the full impact. Data redundancy and Inconsistency: Implementation of ERP solution solves this data redundancy and inconsistency problems because the architecture of ERP is based on a common database and a modular software design.

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Major Vendors and ERP Market:

The five dominating ERP software suppliers are SAP, Oracle, PeopleSoft, Baan and J.D. Edwards. Together they control more than 60% of the multibillion dollar global market.

Each vendor, due to historic reasons, has a specialty in one particular module area such as Baan in manufacturing, PeopleSoft in human resources management, SAP in logistics and Oracle in financials. There are also about 50 established and a few more newly emerging smaller and midsize ERP vendors including third-party developers competing for the ERP market. The result is stiff competition and feature-overlapping products difficult to differentiate. Due to keen competition for control of the lucrative ERP market share, the vendors are continuously updating their products and adding new technology-based features. Long-term vision, commitment to service and support, module features, specialty, experience and financial strength for R&D are considered the major vendor qualities for product selection and turnkey implementation. In the following sections we provide brief profiles of these five ERP giants. SAP AGFlagship Products R/3, mySAP.COM Oracle CorporationFlagship Product Oracle Applications PeopleSoft Inc.Flagship Product PeopleSoft8 The Baan CompanyFlagship Product BaanERP J.D. Edwards & Co.Flagship Product OneWorld

Hypothesis to check productivity:

Effects of ERP adoption on productivity, firm performance and stockmarket valuation using several different models that have been applied in IT and productivity.Using both the cross-section and time seriescomponent of data, we can examine the difference in performance of firms (measuredin a variety of ways) that adopted ERP versus those that did not. We can examine the relative performance of firms before, during and after implementation to examine how the effect of ERP implementations appears over time.Finally, we can use additional data on modules implemented to understand how theextent of implementation affects performance.

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Hypothesis: H1: Firms that adopt ERP systems will show greater performance as measuredby performance ratio analysis, productivity and stock market valuation

H2-1: There is a drop in performance during ERP implementation as measuredusing performance ratios and productivity regressions.

H2-2: There is a continued drop in performance shortly after ERPimplementation as measured using performance ratios and productivityregressions.

H3-1: There is an increase in stock market valuation at the initiation of an ERPimplementation.

H3-2: There is an increase in stock market valuation of a firm at the completionof ERP implementation.

Advantages
The benefits of ERP in any organization are beyond doubt. Some of the key benefits are listed below Reduced planning cycle time Reduced manufacturing cycle time Reduced inventory Reduced error in ordering Reduced requirement of manpower Enables faster response to changing market situations Better utilization of resources Increased customer satisfaction Enables global outreach

Other benefit includes: Cooperation between managers and employees Consolidation of finance, marketing and sales, human resource, and manufacturing applications IT infrastructure, involving building business flexibility, IT cost reduction, and increased IT infrastructure capability

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Organisational, relating to supporting organizational changes, facilitating business learning, empowering, and building common visions A primary benefit of ERP is easier access to reliable, integrated information (information available for all departments like materials management/ inventory/production control etc.) Elimination of redundant data and the rationalization of processes, which results in substantial cost savings. It enables decision-makers to have an enterprise-wide view of the information they need in a timely, reliable and consistent fashion (real-time information available anywhere, anytime). The system provides consistency, visibility and transparency across the entire enterprise. The integration among business functions facilitates communication and information sharing, leading to dramatic gains in productivity and speed.

Category (Tangible / Intangible) Tangible

Benefits Dimension Operational

Sub Dimension

Intangible

Managerial

Intangible

Strategic

Tangible

IT infrastructure

Intangible

Organizational

1.1 Cost reduction 1.2 Cycle time reduction 1.3 Productivity improvement 1.4 Quality improvement 1.5 Customer service improvement 2.1 Better resource management 2.2 Improved decision making and planning 2.3 Performance improvement 3.1 Support for business growth 3.2 Support for business alliance 3.3 Building business innovations 3.4 Building cost leadership 3.5 Generating product differentiation 3.6 Building external linkages 4.1 Building business flexibility for current and future changes 4.2 IT cost reduction 4.3 Increased IT infrastructure 5.1 Changing work patterns 5.2 Facilitating organizational learning 5.3 Empowerment 5.4 Building common vision

Disadvantages

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Personnel turnover; companies can employ new managers lacking education in the company's ERP system, proposing changes in business practices that are out of synchronization with the best utilization of the company's selected ERP.

Customization of the ERP software is limited. Some customization may involve changing of the ERP software structure which is usually not allowed. Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage and the system may be over-engineered relative to the actual needs of the customer.

ERP vendors can charge sums of money for annual license renewal that is unrelated to the size of the company using the ERP or its profitability. Technical support personnel often give replies to callers that are inappropriate for the caller's corporate structure. Computer security concerns arise, for example when telling a nonprogrammer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards.

ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companiesthis is cited as one of the main causes of their failure. The system can suffer from the "weakest link" probleminefficiency in one department or at one of the partners may affect other participants and systems can be difficult to use. Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, and then over time "dirty data" will reduce them reliability of some applications. Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level).

The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale. Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software. ERP systems can be very expensive to install. There are frequent compatibility problems with the various legacy systems of the partners.

The competitive pressure unleashed by the process of globalization is driving implementation of ERP projects in increasingly large numbers, so a methodological framework for dealing with complex problem of evaluating ERP projects is required. It has been found that, unique risks in ERP implementation arises due to tightly linked interdependencies of business processes, relational databases, and process reengineering.

Three main factors that can be held responsible for failure of ERP system arePage | 12

 Poor planning or poor management Change in business goals during project Lack of business management support.

It has been found that companies spent large money in developing ERP systems that are not utilized. From a software perspective ERP systems is complete. But from the business perspective it is found that software and business processes need to be aligned, which involves a mixture of business process design and software configurations. So a purely technical approach to ERP system design is insufficient.

A careful use of communication and change management procedures is required to handle the often business process reengineering impact of ERP systems which can alleviate some of the problems, but a more fundamental issue of concern is the cost feasibility of system integration, training and user licenses, system utilization, etc. need to be checked. A design interface with a process plan is an essential part of the system integration process in ERP.

Before embarking on an ERP system journey, organizations have to ask themselves whether they are ERP ready. Some of the factors to be considered before starting an ERP system implementation are: Infrastructure resource planning Education about ERP Human resource planning Top management commitment Training facilities Commitment to release the right people for the implementation

These factors help organizations to understand their level of preparedness for an ERP implementation.

PEST- Benefit / Threat Analysis

PEST analysis can either be a benefit or a threat to an organization that wants to go for ERP in Cloud. The table presents the PEST analysis in two categories namely: Benefit- Threat. For the factors that are considered as threat for an organization, a possible mitigation approach has been mentioned.
PEST Views Political Factors Category Benefit

Threat Threat Mitigation Approach Resistance by leading Ignore and do not let them influence Page | 13

ERP vendors. Service Survival

Non Compliance Issues Vendor Credentials and Market study to know about the Market existence. vendor and the products. Economical Flexible Payment- Pay per use Low Entry Cost. Low Operational Cost. Low IT manpower requirement. Low Implementation time. Reaching the Loss of key staff Change Management to be adopted extended user within an organization. Get users community. involved, motivated and focused on Resistance to change by the project. Define roles and responsibilities. people. Perceived lack of Clearly define roles and control. responsibilities for users. List resources needed and their usage before ERP adoption. Elasticity Ubiquitous access High internet speed connection to be taken by organization and study of network issues to be done. Customization Service quality To be discussed and finalized with vendor and included in SLA. User friendliness Data Lock in Policies to be framed for retrieving and migrating data to other vendors cloud. Availability To be discussed and finalized with vendor and included in SLA. Backup and Storage It can be improved by using redundant sites. Security The study of security policies, encryption and decryption algorithms supported by vendor to be done to know security measures provided by vendor. Interoperability It is an ongoing issue and to be handled with a specific clause in SLA. Page | 14

the ERP adoption process. Issues related to services to be clearly mentioned in SLA (Service Level Agreement) To be mentioned in SLA.

Social

Technological

Performance

Benchmarking tools can be used measure performance claims of the vendor. After Deploying ERP on cloud performance analysis tools can be used.

PEST-Benefit/Threat Analysis indicates that there are economic benefits involved when a business decides to go for ERP software in cloud. The cost incurred to go for such a solution is much lower than implementing the traditional ERP solution for business as there is no investment in IT infrastructure required. The cost related to IT personnels also reduces. There is a need to pay a hefty license fees to traditional ERP vendors whether or not the organization consistently uses the ERP software, but in

cloud platform there is flexible payment depending upon the usage of the software service. It is termed as pay-per-use. As the number of users and processes on cloud scale the payment needs to be done. Thus there is a huge amount of cost saving, if an organization specially a business goes for ERP solution in cloud.

Conclusion:
After analysing we find thatERP adopters are consistently higher in performance across a wide variety of measuresthan non-adopters. Studies have suggested that most of the gains occur during the (relativelylong) implementation period, although there is some evidence of a reduction in businessperformance and productivity shortly after the implementation is complete. However, thefinancial markets consistently reward the adopters with higher market valuation bothduring and after the adoption, consistent with the presence of both short term and longterm benefits.

Overall, this suggests that indeed ERP systems yield substantial benefits to the firms thatadopt them, and that the adoption risks do not exceed the expected value, although thereis some evidence (from analysis of financial leverage) that suggests that firms do indeedperceive ERP projects to be risky. There also appears to be an optimal level of functionalintegration in ERP with benefits declining at some level, consistent with diseconomies ofscope for very large implementations, as one would typically expect.

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