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Essay: Importance of Enterprise resource planning in manufacturing companies

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  • Published: 21 June 2022*
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Abstract

In our course throughout this semester, we learned about the importance of operations in several industries and how the management decisions related to the whole operational processes could affect the efficiency of the company. More particularly we learned how the operational decisions making are linked to all the functional departments of a company. From this perspective, we decided to learn more about a software that is able to link all the resources inside an enterprise and direct the operations of the firm toward the company strategy. That system was the Enterprise Resources Planning (ERP).

The aim of this paper is to describe, comment and analyze the importance of ERP in the manufacturing companies. We based our discussion on a case study retrieved from ScienceDirect.com that was conducted by Ignatio Madanhirea and Charles Mbohwa “Enterprise resource planning (ERP) in improving operational efficiency”.

This paper concentrates on the benefits of ERP in manufacturing firms and how the adoption of ERP will return positively on the manufacturing processes and on the profit of the company. The purpose of this analysis is to see if the ERP worth the cost when listing all the benefits that ERP offers to businesses. Our conclusion shows that ERP is essential to manufacturing companies for all the advantages it includes. Moreover, by studying the costs that can ERP software eliminate, and by having customized ERP software available in different pricing schemes that varies upon the size of the business and the operations executed, a company can indicate that implementing ERP worth the cost.

I. Introduction

Operations management as defined in all management books is the process of converting labor and materials into goods or services. According to an article published by The Business Development Bank of Canada (2019), they stated that operational efficiency is fully achieved once the whole route of operations that includes people and the work process is combined with technology. In order to make the company more profitable, the management should at first follow an assessment of the current efficiency at the business, second, cut costs and reduce waste, third managers should plan production process and last this should lead to increasing the output. Improving operational efficiency is a big challenge that requires hard work and good planning not to forget the effect of technological resources that make all the process more efficient. To achieve their business goals and have an optimal performance level, many organizations implemented a new technological system (Gartner, 2012). The integration of all information flow between each department in an organization will reflect positively on the overall performance and communication between all company members (Tallon PP, 2011; Goodhue, et al. 2009). The enterprise resource planning (ERP) is defined by Gartner as the method to control and plan all resources in an organization and the ability to deliver integrated information processes that serves all departments in this organization. ERP software is playing a big role in giving a competitive advantage to companies adopting it. By adopting an ERP software operational manufacturing processes are improved through optimizing inventory management, formulate the demand of customers, improve human resources, simplify and restructure the relationship between customers and suppliers, automate processes in order to save costs and improve employee productivity (Craze, 2017). Most manufacturing business costs fall into three categories: materials, labor, and overhead generated from the complex processes that manufacturing industry is facing in our today business environment.

Accordingly, to meet such a challenge of reducing cost, many manufacturing companies followed the new innovation of ERP solution that includes all aspects of the production process from initial quotations to invoicing. According to the business automation specialists USA (2013), ERP systems reduce manufacturing cost by 20% that implies improving operational efficiency.

Moreover, cost control, good communication, training, qualified labor, maintaining good quality, knowledge sharing and improving customer services improve operational efficiency. Firms adopt ERP system because this software takes into consideration most of the functional departments inside an organization since it covers all modules inside the organization such as production planning module, purchasing module, inventory control module, sales & marketing module, financial module, human resources (HR) module, Customer relationship module, and Supply Chain management module. Many companies or small businesses find it very costly and needs a lot of work to implement ERP software and train all employees in order to integrate all data flow in one system and be able to generate useful reports. Panorama consulting solutions USA is the world’s most trusted independent digital transformation and ERP systems experts, in its research conducted in 2017 to study the ERP implementation and satisfaction rate among industries, it shows that most companies implement an ERP system to increase business efficiency. And 93% of those companies enhanced their business processes to better operate.

Hence studying the ERP effect on operational efficiency is an important topic to conclude if implementing ERP software worth the cost.

II. Literature review

1. Enterprise resources planning (ERP)

Enterprise resources planning (ERP) as defined by Gartner is a database that gathers all information from functional departments inside an organization, integrates this information and delivers useful reports. To ensure the best performance level many organization implemented ERP systems that led to improving productivity, lower cost, and increase efficiency among all the functional departments (Nwankpa et al. 2015). The ERP system integrates data recorded from every operational department and makes it accessible to users of the system. This process will facilitate the transmission of information between departments to keep all members updated with the latest figures in order to make fast and accurate decisions regarding all processes inside the firm. Companies in every industry find many advantages in applying ERP systems from operational, managerial, strategic, technological and organizational aspects. Big companies invest big amounts in implementing ERP systems for the benefits and advantages these systems include. Even small to medium enterprises (SMEs) invest in such systems because of the globalization and the rapid growth of businesses. Although ERP systems organize the information and processes inside an organization, yet the challenge is in the user usage of ERP. Moreover, the ultimate objectives in adopting an ERP system is achieved when the end user accept and embrace the technology (Nwankpa.J, 2015). If the users find difficulties in using the system, they will refrain from using it or they will not record all the data on the system or access data in the system. The role of upper management is very important in this case. As much as the management provides employees with all necessary training and support to work on such systems, employees will accept these systems and will find it helpful to use for the benefits of their tasks that will result in developing their internal and external operational processes.

Besides, having all the advantages in implementing an ERP system in organizations, the cost of the software, the maintenance, and the customization requests remain the crucial financial decision that a company has to make after evaluating the cost versus the benefits. Even though the costs could be very high, the satisfaction of ERP adoption and the efficiency in the operational processes could be very beneficial in many companies.

2. Operational efficiency and manufacturing companies

According to a presentation published by Nestle Company in May 2016, operational efficiency is achieved through driving excellence in safety, quality throughout the entire value chain, eliminating waste from the value chain, delivering the right product at the right time, strong performance on environmental indicators, and technology in operations. Every company is required to evaluate its operational performance to design a program in order to enhance the efficiency in its functional departments (Böttcher et al., 2016). Top challenges of operations managers are maintaining the right inventory levels, ensuring quality, maximizing production, eliminate waste, eliminate the bottleneck, establishing technological systems, challenging the global competition and optimizing processes efficiency. An efficient manufacturing sector will help in generating more profits, increasing sales and having a sustainable economic growth (Asaleye et al., 2018). The problem in several manufacturing companies is that they focus on productivity and forget about efficiency.

According to Bohn the Vice President of Industry Cloud at SAP (2017), the most important sections to closely control and focus on in the manufacturing companies in order to generate more revenues are: focusing on the after sale service revenue, using a unique technological applications to motivate customer to share their experience and submit new, enhancing cross-industry information sharing related to the asset to increase the operational efficiency, starting to charge customers per usage of the service that is known as pay-per-use business models, buying new, customized, easy, and technological machines and systems to increase manufacturing agility and providing better services, applying artificial intelligence in company software and machine systems for a better manufacturing planning and scheduling. All these trends are hard to achieve if the company didn’t implement the existing software and technologies available in the market that are able to move the whole operational process from the old fashion to the new structure and practices in operations.

Furthermore, manufacturing resource planning (MRP) and Enterprise Resources Planning (ERP) are the most used software in manufacturing companies. MRP helps streamline the manufacturing process through production planning, scheduling, and inventory control. As for ERP, it is a software that integrates the functional departments of a business, such as sales, purchasing, accounting, Human Resource, customer support, CRM and inventory. It’s an integrated system of the company cross-functional departments as opposed to individual software designed specifically for the business process. By automating the critical workflow toward the company’s strategy, time will be reduced and human errors are decreased significantly thus eliminating costs (Peatfield, 2019). ERP systems take into consideration the importance of the supply chain in the manufacturing industry. The main concerns in a manufacturing industry are to always be on time for their customers, to never have an inventory shortage, to always track price fluctuation and pick the best purchasing price among all suppliers, to identify bottlenecks, to improve the delivery lead time and to maintain quality; all of these are achieved through a well-chosen ERP system that is implemented at the company that will lead to a better productivity and high customer satisfaction.

III. Assessment and evaluation

For a business to have competitiveness in today’s dynamic and complex world, cross-functional decision making and integration of organizational data are required. In this respect, we found a case study titled “Enterprise resource planning (ERP) in improving operational efficiency” to base our analysis with regard to the benefits of ERP in manufacturing companies and to discuss if it worth the cost of implementation.

1. Article Summary

Different operational, managerial and technological challenges are being faced by many organizations in developing countries, including the South African company considered in this research work that manufactures linen and uniform for the hospitality industry in Cape Town, South Africa.

In this article ERP was defined as an efficient information system which improves business competitiveness through cost reduction & better logistics, stating that it’s a method for effective planning and controlling of resources needed to manufacture and deliver products and services, achieved through a software which supports the integration of all organizational information, and considers each transaction as part of the interlinked processes that make up a business.

Composed of many modules, ERP increases operational transparency through a standard interface. The basic modules are identified as follow: ERP production module, ERP purchasing module, ERP inventory control module, ERP sales module, ERP marketing module, ERP financial module, and ERP human resources module; the role of these modules is to optimize the utilization of capacity, automate the processes for suppliers identification and price negotiation, facilitate processes for maintaining appropriate inventory level, order placements, scheduling & shipping, generate marketing leads & identify new trends, gather financial data and generate financial reports, and maintain employee database. The management at this company found that to be able to successfully implement the suitable ERP software, it is better to start with the Business process reengineering (BPR) in order to redesign of organizational processes to achieve improvement in service, speed, and cost. The role of ERP now is to consolidate the process adjustment with a software package using one integrated system, which helps manage all departments, ease day to day business, and increase profits. For that purpose, the managers designed an ERP flow chart to represent the flow of tasks according to the departments’ level. To meet the most of the benefits of an ERP and improve quality, efficiency, process flow and lead times, an External consultant was assigned to follow the process, assist and train employees, solve problems and monitor the implementation stage. In order to mathematically measure the operational efficiency, four ratios were periodically calculated: capacity, utilization, efficiency and, load percentage. The assessment was based on existing information and direct observation of the processes operating in the Design section, Pattern making section, Cutting section, production, and Technical Services section at the company. Productivity was recorded for analysis to develop a trend for a specific period. The main challenges of the company were to deliver on time, improve the capacity requirements planning because they were losing customers since they fail to meet demands and the delays in the processes due to the increase in capacity once the demand increase. Add to this, the untrained workers that were employed, the quantum of paperwork that travels between departments that delay fast decision making, the poor quality control that lacks technology for fast and accurate monitoring. Moreover, the labor cost was extremely high for the reason that at every time demand increases the actual staffs were unable to fulfill the orders, thus the HR department starts to hire new contracts workers.

Consequently, the recommendations for the ERP implementation stage at this company were: having updated technological PCs compatible with the ERP software, adding many computers with high capacity at different sectional departments in order to get fast decision making, train employees and management on Oracle software to get the utmost outcomes, capacity at the linen section has to be adjusted upward and add 4 full-time workers, as for the uniform section hire 1 more worker to meet existing load.

By implementing the ERP software, the company will be able to eliminate waste, defects, manage inventory and control labor and the work in progress through eliminating lead time.

This implementation would improve organizational competitiveness and would enhance communication and cooperation of all departments resulting in operational and employee efficiency since data could now be updated instantly resulting in minimization of waste resources.

2. Evaluation:

This article investigates the benefits of implementing ERP software in a South African company that manufactures linen and uniforms for the hospitality industry.

The company was unable to meet delivery dates and was seeking a permanent solution through proper implementation of ERP which was designed to reduce work in progress and working capital through the integration of firm’s activities and proper communication and collaboration between functional units. On the other hand, reduction of product cycle time was achieved by minimizing delays, coordination machine maintenance with production operations and optimizing space aiming to efficiently utilize available resources.

Hence, ERP software is a useful and very important tool for many organizations, through all the benefits that are following the implementation process from the operational, administrative and managerial section. Figure 1, shows all the benefits that a company can get from ERP adoption.

Figure 1: The Summarization of ERP benefits

Source: Sadrzadehrafiei et al., (2013). The Benefits of Enterprise Resource Planning (ERP) System Implementation in Dry Food Packaging Industry.)

However, there are also challenges that might cause failure when implementing ERP software. Failures could result from insufficient budget allocated to the implementation of ERP, poor planning, humble involvement of employees and un-entered data due to no enough training, squeezed deadlines by the upper management that make the project unachievable or the misfit of the ERP software with the business strategy, the type and the size of the business (Alhayek, 2017).

That’s why it is wise to look at the initial capital spent on the system since it could be very costly to some organization and the success of the implementation depends on many variables such as the skills and experience of the employees, communication between departments also plays an important role, the resistance in sharing information could reduce the efficiency of the software. Not to forget that the system can be difficult for the users if the company staff and managers are not well trained. All these obstacles in the ERP implementation stage could increase the costs generated from this project.

Running over budget is crucial for a company but does it indicates poor operational efficiency when implementing ERP?

In reference to the survey published in 2013 by Panorama USA where over 50% of projects experienced cost overruns and around 50% of respondents did not recover their costs. The same survey was conducted in 2017 and it shows that 74% of respondents overrun the budget that was allocated for the ERP software. This issue of exceeding the budget allocated for an ERP does not indicate the operational efficiency and companies’ satisfaction rate however in the same research in 2017, 78% of respondents found it beneficial for their business to adopt ERP software. Therefore, exceeding the budget assigned for ERP software may be the cause of several internal issues and boundaries that should be investigated and solved in order to adhere to the budget allocated.

IV. Conclusion and recommendations

Enterprise resources planning (ERP) is a tool that helps organizations to organize and plan their resources. It gives the firm the whole picture of the workflow and facilitates the communication and the cooperation between departments. The first consideration when planning to implement ERP software is to give the company the necessary time to change and get ready for the implementation to occur. Internal issues and boundaries should be examined and resolved before the implementation phase starts in order to prepare everyone inside the organization to accept the change and the benefits return that is expected.

For that reason, our recommendation for every manufacturing company is to think about implementing ERP software for all the benefits it includes. The management should not rush the project because it will lead to failure. For instance, when Hershey’s management in 1999 squeezed the deadline and forced everyone to finish the implementation and go live in 2.5years instead of 4 years, they faced a failure that costs the company a drop in its stock price of 35% and a drop in earnings by 18%. On the other hand, this implementation is a particular project for every organization, that’s why the firm should study all its aspects and what are the work types that should be mostly taken into consideration before and during the implementation phase.

Through all the different sizes of ERP software available in the market and the customization function offered with the different pricing schemes, allow us to say that the benefits of ERP worth the cost.

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