Nowadays, businesses require responsiveness, speed and flexibility. Therefore, there is more pressure on supply chains. Not only responsiveness, speed and flexibility have impact on supply chains, also the fact that customer expectations have risen to a certain level, an explanation can be found in the sophistication of customers. Factors that are causing this ‘customer service explosion' are: consumer emancipation, extension of consumer rights, consumer empowerment, etc. (Wilbers, 2015)
A strategy to keep up with the ever-changing business world and supply chains are ERP systems. This paper will elaborate on ERP systems in general, what are the advantages and disadvantages, the evolution from MRP systems to MRP II and to ERP. The different ERP software modules and vendors. Also, this paper will describe the ERP implementation process, common made mistakes while implementing an ERP system and critical success factors in ERP implementation.
ERP is a reason for businesses to keep up-to-date and give a helicopter view to managers. However, every business has its own reasons on why to implement an ERP system. For R&B Civiel- en Cultuurtechniek the main reason was transparency and to improve their CSR, because what most people do not think about, while using an ERP system it will eliminate paper waste for internal communication. (Ringelenstein, 2015)
This paper will research the question: How to implement an ERP system?
Enterprise Resource Planning (ERP)
Enterprise Resource Planning (ERP) is a management system that helps companies manage their business and automate back office functions related to financial accounting, sales, and human resources data, allowing organizations to price their products, produce financial statements, and manage the resources of people, materials, and money. ERP systems are often linked to other computer systems such as accounting and warehouse management software. ERP encompasses software that facilitates the flow of information between all functions using Electronic Data Interchange (EDI), to help management governing the organization. ERP systems integrate all departments of a business, including marketing, sales, product planning, development and manufacturing. (Wilbers, 2015)
EPR is considered as an enterprise application since it is designed to be used by larger corporations and it requires dedicated teams to customize and analyze the data and manage updates and deployment. ERP takes a lot of effort, because the system does not function on its own, and it takes a long time to implement the system. It also requires the participation of every employee within the company. Contradictory, there also exist ERP applications for small businesses, these are considered lightweight business management software solutions and they are customized for a certain business industry e.g. retail. (Beal)
ERP is used to manage product planning, purchasing of parts, keeping track of inventories, interacting with suppliers, providing customer service and tracking orders. ERP can also include modules for finance and human resource departments of a company. Typically, an ERP system is used alongside a relational database system.
The major goal of ERP, when implemented effectively, will be improving business results, by means of ROI, other outcomes of ERP will be increased productivity, make the company more effective, reduce operational costs, and improve quality. (Wilbers, 2015)
ERP systems provides links between different departments with diverse needs to communicate with each other by sharing the same information in a single system. ERP thus increases cooperation and interaction between all business units in an organization on this basis.
ERP systems give managers an integrated and helicopter view of business processes. ERP is designed for a company to adapt to new business demands easily and more flexible. But because ERP is part of technology, it is also important to keep in mind that these systems should be updated every once in a while. (Parr & Shanks, 2000) (Harrison, 2004)
Many companies have implemented ERP systems over the last two decades. Numbers show that it is very useful to implement an ERP system. For example, Supply Chain Management, Customer Relationship Management, Enterprise Performance Management, Human Resource Management, Sales Force Automation, E-Commerce and Business Information Warehousing have grown from USD 17.2 billion in 1998 to USD 39.7 billion in 2011. (O'Leary, 2000) (Dover, 2012)
Fundamental advantages of implementing an ERP system are that it improves the quality and efficiency of business by keeping the internal business processes run smoothly. It saves time and thus money, because there is also more information available. Other advantages are that it gives managers more visibility into processes across various departments. ERP systems see to it that there is an automatic and coherent workflow between different departments. The transition will be smoother and quicker with better communication. ERP establishes a company that can adapt better to change. ERP systems will lead to a company that is more flexible and less rigidly structured, also because there is more information available and decisions can be made faster and easier. (O'Brien & Marakas, 2010)
ERP integrates different modules, this means that individual departments can all use the same software and it is not needed for each department to purchase an own software system. A company can integrate as many or as less modules as it needs because ERP is a modular software system. It
With ERP systems, advanced e-commerce integration is possible for web-based order tracking and processing.
ERP systems ensure centralized business data. This eliminates the need to synchronize changes between multiple systems and brings transparency to statistical data. Also it centralizes safety and security. It enables centralized storage and back-up for the whole company data and also centralized security policies are applied to ERP systems, every occurrence within a company's database can be tracked. (Rajesh, 2011)
ERP systems improve the communication links between the different departments and also between suppliers and its customers. Moreover, ERP systems make it easier for companies to track orders, inventory and revenue and also sales will be easier to forecast. (Wilbers, 2015)
Erik van Ringelenstein, Junior Project Manager Quality with R&B Civiel- en Cultuurtechniek is currently implementing the ERP system – Infraoffice from Bouwinfosys – at the company because management wants more transparency and a helicopter view over the company. Advantages from this system are its design and the customization which is easy to be done by the company itself.
Another advantage from using an ERP system is that all the information can now be found in the company's database. This will also increase the company's CSR because less paper is used for internal communication and usage. Next to that, the company sells its service on contemporary basis, using an ERP system will help them looking back at different phases of the project.
ERP systems will help a company grow, according to van Ringelenstein, R&B was in need of an ERP system because it helped the company with professionalizing and optimilizing the business processes. The business is much more efficient when they use an ERP system. (Ringelenstein, 2015)
Main disadvantages for ERP systems are the costs of planning, customization, configuration, testing, implementation, etc. It is not just the cost of the system itself but the Total Cost of Ownership (TCO) should also be taken into account. A lot of indirect costs should be taken into account like updates and training. It is also highly time-consuming to implement an ERP system properly, it may take up to 1-3 years (or more).
To implement an ERP system successfully it is important that all employees participate and use the system as required. Hence, expensive and exhaustive staff training might be critical. In general, it is also difficult to lean and use ERP systems.
While implementing a new ERP system migration of existing data is difficult, and sometimes impossible. Integrating ERP systems with other stand alone software systems is equally difficult, and sometimes too, impossible. Migrating data may be highly time-consuming, and also consumes a lot of money and resources.
Once an ERP system is implemented into a company, it becomes a single vendor lock-in for further upgrades, customizations etc. Companies sometimes do not have the option to choose out of more vendors, with this in mind they may not be able to negotiate effectively on ERP services. It involves high ERP switching costs and it increases the negotiating power of a vendor, this will lead to expenses in support, maintenance and upgrading, but also in initial costs for new customers.
It is essential to evaluate ERP systems before implementing. If this is not done correctly or not done at all ERP implementations are most likely to become a failure.
A disadvantage of some ERP systems is that they require that a company works together with another system. This is the case with R&B Civiel- en Cultuurtechniek according to van Ringelenstein. Their ERP system, Infraoffice from Bouwinfosys, requires that the company also procures a calculation program. (Ringelenstein, 2015)
The Evolution of ERP
Today's business world requires speed, innovation, responsiveness and flexibility. This puts more pressure on supply chains. Advancements in information technology and applications software led to integrated, software-enabled management systems that help a company to get a helicopter view.
Manufacturing Planning and Control (MPC) is a system used by manufacturing to recognize the demand for products, the planning of the resources needed to produce them and execute and control production. Advancements in technology led to MPC, which is called MRP II. MPC also became a template for manufacturing modules of ERP systems.
Companies rely heavily on MPC systems. In most companies, process and software integration has occurred as companies have implemented ERP systems.
In the 1970s manual scheduling methods were replaced by computerized material requirements planning (MRP) systems. A MRP system could keep track of inventory, order materials, and send instructions to each department on what step to take next. (Dennis, 2007) MRP is one of the most important business processes in MPC. MRP systems serve the needs of production and purchasing departments. Based on due dates for finished goods, MRP establishes the priority plan for due dates and order quantities for the components of finished goods.
Manufacturing Resource Planning (MRP II) is the next step in business process and software application evolution of MPC. It was supported by better information technology infrastructure, and more emphasize on cross functional coordination of supply-chain related business processes. MRP II adds more functionality to businesses than MRP. MRP II integrates business processes and software application, and heightened the involvement of key functions – production, marketing and finance – in the MPC process.
MRP is based on dependent demand and on expectations of sales and marketing, whereas MRP II was meant to calculate the expected delivery date and required capacity, taking into account possible bottlenecks, using the Theory of Constraints (TOC). ERP is the next step in MRP and MRP II systems and controls and manages all business processes. (Wilbers, 2015)
The evolution to ERP systems in the 1990s was enabled by availability of new and better information technologies, notably faster transaction processing speeds, and more powerful data base applications that could support the vision of enterprise-wide, cross-functional and seamlessly integrated software applications. Another factor that was integrated in ERP systems was the integration of MPC functions with the requirements and activities of upstream suppliers and downstream customers and distributors. (Finney & Corbett, 2007)
ERP evolved from MRP II in the manufacturing sector to a more technology-enabled and best-practice-based software. Individual functions such as marketing, sales, finance, manufacturing, R&D, HR, distribution and logistics are designed from both a business process and application software standpoint to be working toward the same business objectives. (APICS The Association for Operations Management, 2010)
ERP Software Modules
ERP systems integrates different core business areas. In practice, every system typically consists of multiple modules that are individually purchased based on a company's specific needs and requirements. Some of the most common ERP modules include those for product planning, material purchasing, inventory control, distribution, accounting, marketing, finance and HR.
Since ERP systems have become more popular, software applications have emerged to help business managers implement ERP in to other business activities and may incorporate modules for CRM and business intelligence, presenting it as a single unified package.
The basic goal of using an enterprise resource planning system is to provide one central repository for all information that is shared by all the various ERP facets to improve the flow of data across the organization. Figure 1 refers to different modules in an ERP system.
Depending on a company's size, requirements and needs there are different ERP vendors to choose from in the large enterprise, mid-market and the small business ERP market. (Beal)
Large Enterprise ERP (ERP Tier I)
ERP systems for big companies is dominated by three companies, namely: SAP, Oracle and Microsoft.
Mid Market ERP (ERP Tier II)
ERP systems for mid-sized companies are supplier by Infor, QAD, Lawson, Epicor, Sage and IFS.
Small Business ERP (ERP Tier III)
ERP systems for small companies are offered by Exact Globe, Syspro, NetSuite, Visibility, Consona, CDC Software and Activant Solutions.
ERP Implementation Process
Implementing ERP systems can be quite straightforward when companies have a simple structure and operate in one or a few locations. But when companies are structurally complex and geographically spread, implementing ERP systems involves difficult, possibly unique, technical and managerial choices and challenges. (Markus, Tanis, & Fenema, 2000)
Implementing an ERP system is among the most expensive, time-consuming and complicated tasks an IT department can take on. There is a lot of potential in delays and unexpected expenses. (Schiff, 2012)
There are 6 stages that form an ERP implementation project, namely; Discovery and Stratigic Planning, Design and Review, Development, Testing, Deployment, and Ongoing Support.
Discovery and Strategic Planning
This first stage already starts during the sale and then continues post-sale. In this stage a project team will be assigned to work on the implementation of the ERP system. The project team will be formed with employees from sales, customer service, accounting, purchasing, operations and senior management. It is important to form a team with both first line workers as well as management.
During this stage an analysis based on which business processes should be improved will be made and objectives will be defined. ERP systems are massive and a company cannot implement every function. The scope of the implementation should be identified. Ideally, the scope should be all inclusive. But practically, it is very difficult to implement.
it is also very important to have a deadline set for the project. For large organizations like Sabic a deadline of two years will be given to implement a new ERP system. (Vaessen, 2015) Smaller companies like R&B Civiel- en Cultuurtechniek will have a deadline of approximately half a year. Erik van Ringelenstein started with the planning stage in August 2015, and the deadline when the ERP system should be fully integrated and implemented in January 2016. (Ringelenstein, 2015)
There will be initial meetings and documentation established as the team works to identify current issues and potential solutions. Also, during this stage the project plan will be constructed. This plan will include the predefined goals and objectives, timelines, training procedures, as well as individual team responsibilities. The project plan will serve as a guide throughout the rest of the project.
Before starting with the implementation of an ERP system, it is also advisable to create new working space for the project team where it is possible to brainstorm, have meetings and have space to work. Another factor that companies should think about is that the company's software should be up to date. (Ringelenstein, 2015)
Design and Review
In this stage the software's capabilities will be designed and reviewed, and how it will look like and how it will be used in the organization. In this stage the team will develop various configurations for the new system, defining roles, and documenting standard operating procedures.
The third stage is the development stage and in this phase the company will prepare the system for going live. This also includes activities such as completing customizations, developing employee trainings on the usage, and importing data. After the data is imported into the ERP database, it must be reviewed for accuracy and completeness. Data drives the business, so it is very important that the data is accurate.
The testing stage will often overlap with the development stage. In this stage the system's functionality will be aligned to set the requirements and determine whether modifications need to be made. A final test should be done by the project team to see if ant adjustments should be made. By the end of this phase, project members should be feeling comfortable with the new ERP system. This is also the final step before the system goes live.
In this step the project team will assess the situations and decide whether the system is ready to go live. In this stage the employees will be trained and final data will be uploaded into the database.
Evaluation and Ongoing Support
Once the ERP system has gone live, the purpose of the project team will shift. The project team will evaluate the process and see if the goals and objectives made in the first stage are being met. Also a post-implementation audit will be performed after the system has been up and running. The ROI of the company will also be reviewed to see if the system has had positive impact on the company's performance. Over time, as the way the users work within the system evolves, adjustments and changes to the system configuration may be needed. (PC Bennett Solutions, 2013) (O'Donnell)
Common Mistakes in Implementing ERP
A poorly planned and implemented ERP system can cost companies a lot of time and money and will result in lost productivity and delays.
Mistakes made by companies while implementing a (new) ERP system is most of the times due to poor planning. Planning is absolutely necessary to have a successful ERP implementation. A solution to this will obviously be a better planning ahead. Companies should conduct an internal audit of all their policies and processes before contracting an ERP vendor. Also, if a company is not capable on their own to plan and evaluate ERP systems on them selves, it is advisable to outsource this to a third-party consultant.
Another mistake is that ERP vendors are not properly assessed. Assessment and research is necessary to have an ERP system that confirms with a company's policy etc. therefore it is advisable for a company to ask for references.
Companies often do not understand the key features of an ERP system, this can also lead to a dramatic ERP implementation and usage. Without knowing the features, companies miss out on opportunities to automate business processes. A solution will be to create a master list with all the features and conduct in-depth research to the different features.
Another common made mistake in implementing ERP systems is underestimating the time and resources required. This can be due to the fact that there are not the right people on the team from the start or just poor planning. Also, managers often underestimate the importance of accurate data. An ERP system can only be successful if the data is correct.
Often, companies go wrong during ERP implementation when they do not invest in training and change management. Making sure employees have a chance to become comfortable with the new system before it goes live will contribute to a successful ERP implementation.
Another mistake often made by companies during the ERP implementation is that the system is not tested well enough before it goes live. Also after going live it is important that a company keeps up with the updates of the system and pays enough attention and money to maintenance of the system. (Schiff, 2012)
Critical Success Factors of ERP Implementation
While implementing a new ERP system there are different strategic approaches a company can make. The first and most common one is to implement an ERP system of a standard standard package with minimum deviation from the standard settings. The second one is to have a customized ERP system to suit the requirements and needs of a company. (Light & Holland, 1999)
One of the most important things while implementing an ERP system is to ensure that employees have had sufficient training with regard to the system and they know how to handle the system. This will also eliminate, for the most part, employee resistance against the system and will give employees a more positive view to the system. (Ringelenstein, 2015)
Based on the research question “How to implement an ERP system” it is obvious that there are different ways to implement an ERP system.
However, it is advisable for a company to stick to a certain structure while implementing an ERP system. The implementation process consists of 6 steps: Discovery and Strategic Planning, Design and Review, Development, Testing, Deployment, and Ongoing Support.
A company should go around the most common mistakes companies make while implementing ERP, one of the most common mistakes is a poor planning.
A company should be aware of the different implications a ERP can have and should have a plan B for implementing an ERP.
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