ERP and Its Impact on Business and Productivity (MIM 218) (1)

8/12/2019 ERP and Its Impact on Business and Productivity (MIM 218) (1)

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ERP and its impact on business

and productivity

Submitted by

MansiVaghela

Roll no. 218

Masters in Information Management

(20112014)


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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 onesingle 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. Material

requirements planning (MRP) systems were

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 thematerials 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 six-

stage 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 often-

changing ERP environment, and achieve a more successful ERP implementation.

ER

P

imp

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ent

atio

n

qua

lity

(the

tec

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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 availablefor all departments like materials management/ inventory/production control etc.)

Elimination of redundant data and the rationalization of processes, which results in substantial costsavings.

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)

Benefits

Dimension

Sub Dimension

Tangible Operational 1.1 Cost reduction

1.2 Cycle time reduction

1.3 Productivity improvement

1.4 Quality improvement

1.5 Customer service improvement

Intangible Managerial 2.1 Better resource management

2.2 Improved decision making and planning

2.3 Performance improvement

Intangible Strategic 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

Tangible IT infrastructure 4.1 Building business flexibility for current and

future changes

4.2 IT cost reduction

4.3 Increased IT infrastructureIntangible Organizational 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 ERPsystem, 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 ERPsoftware structure which is usually not allowed.

Re-engineering of business processes to fit the "industry standard" prescribed by the ERP systemmay 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 thecompany using the ERP or its profitability.

Technical support personnel often give replies to callers that are inappropriate for the caller'scorporate 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 businessprocess 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 ofthe 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. Acompany 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 are-


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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.

Acareful 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 Factors Category

Benefit Threat Threat Mitigation Approach

Political Resistance by leading Ignore and do not let them influence


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ERP vendors. the ERP adoption process.

Service Survival Issues related to services to be

clearly mentioned in SLA

(Service Level Agreement)

Non Compliance

Issues

To be mentioned in SLA.

Vendor Credentials and

Market existence.

Market study to know about the

vendor and the products.

Economical Flexible

Payment- Pay per

use

Low Entry Cost.

Low Operational

Cost.

Low IT manpower

requirement.

Low Implementation

time.

Social Reaching the

extended user

community.

Loss of key staff Change Management to be adopted

within an organization. Get users

involved, motivated and focused on

the project. Define roles and

responsibilities.

Resistance to change by

people.

Perceived lack of

control.

Clearly define roles and

responsibilities for users. List

resources needed and their usage

before ERP adoption.

Technological Elasticity Ubiquitous access High internet speed connection tobe 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.


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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.

ERP and Its Impact on Business and Productivity (MIM 218) (1)

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