ERP Systems – Critical Issues and Success Factors

An ERP system is a software solution which aims to integrate and consolidate all business units and functions across a company into one unified single information system which serves the needs of each business unit and function effectively. The major challenge in designing an effective ERP system is the consolidation of business units whose needs may differ significantly under one information system, for example, supply chain and human resources. These two units have vastly differing requirements when it comes to information systems; supply chain will want to see current finished product stock levels in warehouse, raw material in stock, output from manufacturing, lead times etc. while human resources will want to see employee records, absenteeism reports, management feedback reports and compensation and benefits information. The challenge exists in meeting the needs of both these users without compromising the agility, size and efficiency of the information system. (Koch, C., Wailgum, T., 2008)

When an ERP system works as designed, the benefits to the company can be immense – individual units can share information and tracks each other’s progress through business processes, allowing for decreased lead times and increased processing speed. For example, the finance department can check to see if an order has been shipped by accessing the logistics department or the human resources department can query the finance system automatically to see if an employee has been paid without having to pick up the phone.

Critical Issues & Success Factors

An ERP system implementation is a major undertaking for any company and can take considerable time to implement and cost millions of Euros. Once a system is implemented it can be very difficult and expensive to reverse or ‘roll back’ to the previous systems so significant planning is required to ensure the systems meets user requirements. It has been noted in the literature that the implementation of many ERP systems fail (Legare, 2002).

Definition of Business Processes

Having well defined business processes within a company prior to implementation of an ERP system is critical. In a recent paper the failure of an ERP system in a manufacturing company was examined. The authors noted that the management concluded that the system failed as no major differences in scorecards of management or operations were observed after a number of years running the new system. Following a consultation process the authors found that the main reason behind the disappointing performance was the absence of well-defined business processes rather than ERP software (Jong-Sung and Aggarwal, 2009). Prior to any implementation, business process reengineering needs to be undertaken to ensure success.

Management Buy-in

The literature surrounding implementation of information technology and software projects clearly demonstrates that if the project is to succeed, buy-in and support from top management is critical (Johnson, 1995). Management must recognize the strategic importance of the implementation of an ERP system as opposed to just viewing it as the roll-out of a new software system.

Collaboration with External Consultants

Because the ERP market has grown so rapidly, there has been a shortage of competent ERP consultants (Bingi et. al., 1999). Finding the right external consultants can be difficult and the challenge lies in managing them through the implementation. Because of this skills shortage, if an integral internal employee leaves a road block can be hit in the project, leading to significant costs and time loss, with the potential of project failure.

Project Champion

A project champion is more important in ERP implementations than in other IS implementations because ERP success hinges on overall organizational commitment and perseverance. The project champion should be a high-level executive within the organisation with the power to set business goals and implement change. Their role is critical in driving consensus among other executives and middle management and in overseeing the entire life cycle of the implementation (Fui-Hoon Nah, F. et. al., 2003). The project champion must constantly resolve conflicts and manage resistance as well as change to ensure the project move to successful completion (Stefanou, 1999).

Project Management

Good project management is essential because success in ERP implementation, as in most IS projects, is commonly evaluated based on the degree to which time and budget requirements are met (Fui-Hoon Nah, F. et. al., 2003).  The length of implementation is affected to a great extent by the number of modules being implemented, the scope of the implementation (different functional units or across multiple units spread out globally), the extent of customization, and the number of interfaces with other applications (Bingi et. al., 1999). Budgetary factors hinge mainly around human capital factors – the cost of proprietary software is economical compared with in-house development and the cost of implementation could be as high as three to five times the cost of the software. The greater the degree of customisation required, the greater the cost of the project (Bingi et. al., 1999). The cost of hiring external consultants can sometimes consume up to 30% of the total project budget, however hiring in expertise in the form of internal consultant present its own difficulties. The danger lies in highly-invested, highly trained staff being poached by competitors as their skill set is so much in demand (Bingi et. al., 1999).

Other critical success factors which are seen as essential to a successful implementation included; end-user involvement, communication and teamwork, training and support for users, a comprehensive change management plan, selection of the correct ERP system to meet the businesses goals, a vision statement and adequate business plan (Fui-Hoon Nah, F. et. al., 2003).

Benefits of ERP systems

One of the most important benefits of an ERP system for an organisation is that it provides the enterprise with the capacity to plan and manage its resources based on an integrated approach (Turban et al., 2003). ERP systems reduce operating costs, facilitate day-to-day management of business activities and support strategic planning. Many business functions can be integrated under one unified system including financial information management systems (FIS), human resource management systems (HRM), manufacturing information systems (MFIS), supply chain management systems (SCM), customer relationship management (CRM) systems and management information systems (MIS).

This integrated approach allows for ease of access to information in real time by different users along different points along the ERP. A user of the SCM system can query the MFIS to check lead time on product manufacturing and modify raw material stock levels accordingly or organise logistics for finished product. This ability to query different modules without the need for human interaction leads to an increase in efficiency and productivity, and ultimately profitability. Furthermore, it allows for reduced operating costs such as lower inventory control cost, lower production costs, lower marketing costs and lower support costs. The availability of shared information across different units also allows for an increase in the accuracy of forecasting which allows the organization to strategically plan future requirements. Successful planning and forecasting can decrease manufacturing lead times and product delivery times for customers, increasing satisfaction. An important example of how this has been used successfully within the supply chain is the ‘Just in Time’ (JIT) methodology, and is defined as a ‘philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity’. The basic elements of JIT were developed by Toyota in the 1950’s, and became known as the Toyota Production System (TPS) (Liker, 2003).

Benefits of Business-to-Business (B2B) SCM systems

Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). SCM incorporates all storage and movement of raw materials, in-process inventory and finished goods from the point of origin to the point of consumption, this progression termed the supply chain.

Organizations can benefit from SCM systems by reducing operating costs, reducing inventory and raw material warehousing costs, reducing wastage, optimizing logistics and increasing customer satisfaction.  Companies using an ERP SCM system have access to forecasting and analysis tools which allow supply chain managers to predict the amount of raw materials required in a defined future period. This forecasting system allow them to order the optimum amount of raw materials needed, within an acceptable level of error, so that unnecessary stock in not transported, off loaded and stored, as these processes cost money and resources. Similarly, with in-process inventory, warehousing costs can be reduced with tight control over the amount of goods traversing the supply chain at any particular point. With special reference to the food industry, wastage and spoilage can be minimized by effective supply chain management systems, however, special factors such as shelf life and storage temperature need to be taken into account. With increased operating efficiency, delivery times can be predicted with a level of accuracy and this can lead to an increase in customer satisfaction.  ERP SCM systems can also support complex supply chain methodologies such as make-to-order (MTO), make-to-stock (MTS) or just-in-time (JIT) and collaborative programs such as vendor managed inventory (VMI) and continuous replenishment programs (CRP).

Copyright Eamonn O’Raghallaigh 2010 / WebScience Ltd