Enterprise Resource Planning Systems For Smes

Several researches have revealed that Enterprise Resource Planning (ERP) systems bring greater benefits to organisations, small or large. These reports asserted that successful implementation of the right ERP solution will empower the financial success of the organisation while its failure can spell doom and gloom. SMEs in contrast to their larger counterpart have peculiar challenges that further make the choice of ERP solution difficult. These challenges have defined the expectations and requirements of SMEs from ERP solutions. Various ERP software are available in the market for their use, with the software leader being SAP, but it is essential for an SME to select the appropriate software solution that appropriately address their needs putting in consideration their peculiar predicament. This is easily achieved through an adequate software selection and evaluation process. This research looks into past works on ERP implementations for SMEs to come up with ERP requirements for SMEs; available software (and hardware) solutions available to them and a detailed software evaluation and selection process in line with industry best practice which they can use. It also addresses current ERP market and market trends.

Methodology

This paper is largely based on review of previous academic documents in form of journals, conference documents and books. These were reviewed extensively in line with the topic of discussion. Another helpful source of information used in the report is the internet. Through the internet, we were able to get more current information and data to support previous academic works.

While we have done extensive research on this topic, it should be noted that the academic documents used in this research represent just a subset of the numerous documents that have been written concerning this topic. They are by no means a perfect representation of all the possible views.

Table of Contents

1

Abstract 1

Methodology 1

Table of Contents 2

Introduction 3

Enterprise Resource Planning (ERP) Systems 4

Small and Medium Size Enterprises (SMEs) 4

ERP Market and Market Trend 6

ERP Requirements for SMEs 9

Analysis of ERP Solution (Software and hardware) 11

SAP 11

Oracle ERP Software 14

International Financial Services (IFS) 15

SAGE Accpac 15

Microsoft Dynamics 16

Open Source Software (OSS) 16

ERP Evaluation and Selection process 17

Stage 1 – Plan Requirement 18

Stage 2 – Request for Proposals (RFP) 19

Stage 3 – Solution Evaluation 19

Stage 4 – Contract Negotiation 19

Stage 5 – Selection and Agreement 20

Introduction

Enterprise resource planning (ERP) systems, according to Joseph et al 2003, is now being promoted as a desirable and critical link for enhancing integration between all functional areas within an enterprise and between the enterprise and its upstream & downstream trading partners.

Despite all benefits potentially offered by ERP systems (Banker, 1998; Hicks, 1995; Minahan, 1998) however, the issue of organisational changes needed by ERP implementation as well as predicting return on investment assumes particular importance within small and medium-sized enterprises (SMEs) because of their peculiar challenges.

In SMEs, the implementation and the evaluation of the potential benefits is still a difficult task. (Ravarini, 2000).

(Chan, 1999), asserted that many SMEs either lack enough resources or are not enthusiastic about committing a huge fraction of their resources to ERP implementation due to long implementation period and high fees associated with ERP, (Chau, 1995). These amongst other factors have resulted in slow ERP adoption by SME (Tagliavini et al, 2002).

Nowadays, some SMEs are not only seeking ways of integrating their various island-of-information within the organisation, but have also moved to extend the whole scope beyond their organisation to include their suppliers, trading partners and customers (Charlesworth et al., 2002). Therefore, implementation of a right and cost effective ERP solution is essential. This however must be preceded by an accurate ERP software evaluation and selection process.

This paper explores ERP for SMEs and is formatted as follows; Introduction, Methodology, Background on ERP, ERP Market and Trends, ERP and SMEs, ERP requirement for SMEs, Different Software (and Hardware) Solutions Analysis & a Detailed Software Evaluation and Selection Process, Discussion, Conclusion and Future Research work.

Enterprise Resource Planning (ERP) Systems

ERP systems can be defined as the most predominant computing systems for business in a lot of organisations, both in the public and private sectors (Gable, 1998)

The ERP software can be customised to support critical existing processes which organisations follow (Stefanou, CJ., 2001)

Included in an ERP system are: Storage, orders, assets, vendor contacts, purchasing, financials and human resources (Dahlen C. and Elfsson J., 1999)

(O’Leary, 2000) stated that “An ERP system integrates the majority of business processes and allows access to the data in real time”. However, (Gardiner et al., 2002) also stated that “an ERP system improves the performance level of a supply chain by helping to reduce cycle times”.

Other benefits which enterprises enjoy by implementing an ERP system include: better customer satisfaction, reduced quality cost, increased flexibility, improved resource utility, improved decision-making capability, improved information accuracy and improved vendor performance (Siriginidi, 2000).

The flip-side to this is that, most ERP software tend to be complicated, large and expensive (Mabert et al., 2001). The implementation of an ERP system is time consuming and puts pressure on an organisation’s information technology (IT) department or outside professionals (Khaled Al-Fawaz et al., 2008)

“Putting ERP in place requires new procedures, employee training, and both managerial and technical support”. (Shang and Seddon, 2002)

Small and Medium Size Enterprises (SMEs)

SMEs, in most countries are businesses that employ fewer than 250 people. For some other countries, SMEs are those which employ fewer than 500 people. Countries like these include: USA, Italy and Australia. 99.9% of the businesses in Albania come under SMEs. (Nito E., 2005)

ERP customers are usually split into three market divisions by annual income. These include: large, mid‐market and small. The borderline of these divisions tend to be different, depending on which ERP vendor is using them.

For small enterprises, Sage, SAP, Microsoft, Infor and to a slight extent Lawson, compete with a number of smaller vendors for ERP systems.

Figure 1: Source: bla bla bla

As shown in the diagram above, only SAP and Sage have set ERP products designed for the small enterprise market. The other vendors compete in this division with products that they also use for the mid‐market.

The top six vendors compete in the mid-market. A lot of these products are industry specific e.g. pharmaceutical distribution, project‐oriented services, process manufacturing, etc. Successful competition has been attained by the leading ERP vendors adding sector specific focus to their products.

This has been approached by: Industry‐specific pre‐configured templates using a standard ERP product being developed by the ERP vendor (e.g. Oracle’s Business Accelerators or SAP’s Best Practice Templates).

ERP Market and Market Trend

Trend, as defined by (Kotler, 1997) is: “A direction or sequence of events that have some momentum and durability”.

Over the last decade, the ERP market has grown very quickly. The three main reasons for this growth are: globalisation, year 2000, and the need for better information integration. (Dahlen C. and Elfsson J., 1999)

As at 1998, Merrill Lynch estimated that 40% of companies with revenues over $1billion had already implemented base ERP systems in the USA (Caldwell & Stein, 1998) and had started implementing additional applications, a market that was estimated at $8billion by 2002.

An American-based research firm, AMR Research, also predicted the enterprise applications market could hit $78billion by 2004 compared to $27million in 1999 (Stefanou, CJ., 2001). However, according to Gartner group, a high percentage (88%) of the ERP market is concentrated in the western countries.

SAP, the German flagship company, holds a global market share of 32%, while Oracle has a global market share of 14.5%. Both vendors have the lion share of the Global ERP market. However, this is not the case in the Chinese market where SAP and Oracle hold a combined market share of 24.4% and the domestic companies holding a combined market share of 51.6%. (Huigang Liang et al., 2004)

“Total ERP market revenue grew to over $28B in 2006. This was driven by a combination of strong customer demand and leading vendors expanding their product portfolios through acquisition”. (Jacobson S., 2007)

As at 2000, the AMR Research, Inc. predicted that the ERP market would grow at a compound annual growth rate of 37% over the following five years.

Currently, SAP and Oracle have dominated the market. Their competition, however, lies in the SMEs market – With rivals like: Sage group, Microsoft, Epicor and Lawson (Jacobson S. et al 2007)

Below is an ERP application revenue estimate for 2006 – 2011

This was estimated as at 2007 by the AMR, Research GroupFigure 2: (Jacobson, S. et al 2007 “The ERP Market sizing Report, 2006-2011”, AMR Research., ERP 2007 Market sizing series).

In recent times, the ERP Vendor Outlook has changed a lot. Six vendors are responsible for almost two thirds of global ERP sales. Oracle and SAP control 50% of the World market by income. At the start of the last decade, Infor and Microsoft did not have a market presence.

Below is a pie chart showing Global ERP Revenue by Vendor (2008) Figure 3: Source: BSM, ERP. May 2010

ERP Requirements for SMEs

According to Huin 2004, SMEs have an enormous difference in needs, operating requirements, logistics fulfilment and financial capabilities compared to their large counterparts.

First among these requirements is a cost effective ERP solution. Costs associated with ERP solution include not only the software, but also to items such as training, hardware and consulting (Willis et al 2001).

Besides, most ERP software available in the market, according to Bounanno G. et al 2005, are just too expensive for SMEs.

Chan R. 1999, supported that “many small-medium enterprises either do not have sufficient resources or are not willing to commit a huge fraction of their resources due to long implementation times and high fees associated with ERP implementation”. This emphasises the fact that cost is a major factor for SMEs when attempting to undergo a capital intensive venture like ERP implementation. A research of 50 Italian SMEs carried out by Federici 2009 suggested that small and medium enterprises mostly chose systems provided by small national software houses obviously for cost reasons.

Contrast to larger establishments, SMEs have limited experiences, human resources and skills that are necessary for some kind of ERP implementations according to Adam and O’Doherty 2003 cited in Winkelmann and Klose 2008. It is a well known fact that most SMEs have a scaled down number of employees who handles more than one function.

This position is further supported by Huin 2004, which confirmed that most SMEs experience a high turnover rate compared to large companies. That work further stated that “high turnover rate adversely impacts how SMEs manage their labour resource-a key resource input in any ERP project”.

This is in line with the research work of Winkelmann A et al 2008 which emphasised that a dedicated IT department addressing the selection and implementation of an ERP system don’t actually exist in most SMEs. As such most SMEs have requirements for ERP solutions (software and hardware) that leverage on their lean human resources, especially in the IT department and provide a user friendly platform not riddled with so many complications.

Achanga et al 2006 confirmed in his work that most SMEs do not have a good management structure on which innovations such as ERP thrives. It is customary to have the Managing Director or the CEO involved in daily administration of the companies in addition to making strategic decisions. They further explained that most SMEs were established by owner managers who may not have the tactful management know-how. As such, strategic progress is usually hampered by lack of good leadership traits which bring about informal working processes. This was supported by (Mintzberg H. et al 2003 p.217).

Processes here according to Beretta 2004 “is the medium that coverts activities efficiently and effectively in order to generate value for a specific customer”. It is important to note that these processes are what ERP serves to integrate. As such ERP solution for SMEs must be simple and flexible to accommodate these peculiarities of most SMEs. Such flexibility involves things like allowing only specific modules or even sub-modules to be implemented.

The type and focus of the SMEs should begat the requirement for consideration in the choice of ERP solution. Most SMEs have very specific operations and as such have very specific processes. These processes differ according to the specialisation of the company. Example is the case of a construction company in Taiwan that wanted to implement ERP but could not get software fit because of its unique operations (Yang J et al, 2007).

Another example: Made-To-Stock (MTS) manufacturing companies have different ERP requirements from Made-To-Oder (MTO) companies (Deep A. et al 2007). The implication is that MTO and MTS have different production processes and thus will need a system that aligns with their peculiar requirement.

We can therefore conclude according to Deep A. et al, 2007 that issues relating to the specificity of an organisation will need to be determined before proceeding to make a choice on the ERP solution for implementation.

Analysis of ERP Solution (Software and hardware)

ERP software belongs to a suit of software called Enterprise system software. According to Shanks G. et al 2003, it is;

a set of packaged application software modules, with an integrated architecture, that can be used by organizations as their primary engine for integrating data, processes, and information technology, in real time, across internal and external value chains

impound deep knowledge of business practices that vendors have accumulated from implementations in a wide range of client organizations, that can exert considerable influence on the design of processes within new client organizations

is a generic “semi-finished” product with tables and parameters that client organizations and their implementation partners must configure, customize and integrate with other computer-based information systems to meet their business needs.

Thus, ERP software are sold to organisations on the platform that it’s a way for them to implement best practices in an organisation (Wagner and Newell 2004), but there is a vast gap between this theory, the actual implementation and use of the software. The idea behind the software use is that a blend of “best practice” within a particular industry is built into the design so that this can be used by a similar company irrespective of where it is to automate its working process.

According to Holland and Light 1999, most organizations now opt for “off the shelf” software instead of developing one in-house for its function.

While there are over one hundred ERP software available, we will be reviewing a list of some well known ERP solutions available to an SME below;

SAP

A company that started in Germany, the application has captured the integrated market of most large and medium market throughout the world (Martin and Cheung 2000). With high functionality and a great deal of integration, the solution covers requirements such as financial accounting and control, sales and distribution, materials management, production planning and human resource management.

Bancroft et al 1998 revealed that SAP design consists of the following layers of software;

The SAP graphical user interface (GUI) representing the presentation layer;

The SAP application layer; and

The SAP database layer

SAP supports critical business functions and processes and can actually be tailored to meet the business needs of any enterprise (SAP Global, 2010). It delivers the following solutions

SAP ERP Financials: helps addressing changing financial reporting standards, improve cash flows and manage risks

SAP ERP Human Capital Management: helps in automating key processes like End-user service delivery, workforce analytics, talent management, workforce process management and workforce deployment

SAP ERP Operations: helps with process like procurement and logistics execution, product development and manufacturing and sales and services

SAP Corporate Services: covers real estate management, Enterprise asset management, project and portfolio management, travel management, environment and safety management, quality management and global trade services

SAP Global claimed that the product helps in increasing oversight of business operations and providing adequate information for strategic business decisions. It also claimed high flexibility and innovation and that modules can be implemented as needed and upgraded as the need arises. The SAP for SMEs has been implemented by over 80000 SMEs.

Figure 4 below shows the SAP Solution roadmap showing the multiple level of blueprint of processes supported by SAP.

SAP’s benefits were echoed by the research work of Mandal and Gunasekaran 2003. This was implemented at PMB Water Corporation. They discovered greater benefit of implementing SAP.

However, Al-Mashari and Zairi 2000 confirmed that SAP is a very complex solution that is too prone to failure. This position is supported by the research work of Martin I. et al, 2000 in an organization in Australia where he discovered that the training was complex, expensive and enormous. It is also not a user friendly application. For a small and medium sized company this enormous complexity and capital investment among other things is not one that can be readily and easily accommodated as previously stated in the requirements section.

Figure 4 – SAP Solution Roadmap (available at http://www. sap.com/businessmaps

However, it should also be noted that quite a number of medium establishments have been able to implement SAP successfully and are reaping the benefits (Martin I. et al 2000).

Oracle ERP Software

The Oracle ERP software is part of the Oracle e-Business suite. It consists of the following modules (Oracle 2010);

Channel Revenue Management: enables information driven channel management. Includes modules like Accounts receivable deductions settlement, channel rebates and point-of-sale, partner management, price protection and supplier ship and debit

Financial Management: covers things like Asset lifecycle management, cash and treasury management, credit-to-cash, financial control and reporting, financial analytics, governance, risk and compliance, lease and finance management, procure-to-pay and travel and expense management

Human Capital Management: includes Global Core HCM , Workforce Management, Workforce Service delivery, Integrated talent management, and HR analytics

Project Portfolio Management: Involves things like project analytics, project billing, project contracts, project collaboration, project costing, project management, project portfolio analysis, project resource management and time and labour.

According to Oracle, Oracle E-Business suite is the most adaptable global business platform and the most customer-focused application strategy. This opinion seems to be supported by Panorama Consulting group 2010, that the software has the highest level of predictability of all ERP software that was studied, and that the average initial cost to implement is 25% less than that of SAP. It also claimed that Oracle’s total cost of ownership is nearly 50% less than that of SAP. The fact remains though that its usage does not as yet compare to that of SAP. This is true considering the fact that there has not been much academic research into the use of the software as an ERP solution.

International Financial Services (IFS)

IFS is a single, integrated product supporting the management of 4 core processes (IFSWorld 2010);

Service and Asset, Manufacturing, Project, Supply chain.

It can be added to other suites of software e.g. Financials, Human Resources, Sales and services, Engineering, Project, Manufacturing and Distribution. According to IFSWorld 2010, it’s easy to use software that provides an attractive, intuitive and efficient user experience. It is also quite flexible, allowing an organisation to choose the required module and upgrade at a future date if so desired.

The benefits of IFS was supported by the work of Lahikainen T. et al 2000 comparatively saying that ERP software like SAP is rather clumsy and large, and because of this cannot easily be reworked to suit a business process. Rather, the business will have to readjust its process for the software.

SAGE Accpac

This product offers middle sized organisation an adjustable enterprise resource for finance, SRM and operations (Sage, 2010). It supports global aspirations for mid-market and upper-mid-market companies with its robust financial management capabilities and flexible open architecture.

Modules of the software include;

Financials: General Ledger, G/L Consolidations, Reporting, Multi-Currency, Intercompany Transactions, Transaction Analysis and Optional Field Creator

Purchasing: Purchase Orders, Accounts Payable, Electronic Funds Transfer (ETF), Direct payables, Document Management, Fixed Asset Management, Check and Form printing

Sales and Receivables: Order Entry, Accounts Receivable, EFT Direct Receivables, Electronic Data Interchange (EDI), National Accounts Management, Unit Sales Analysis, Return Material Authorization (RMA)

Customer Management: Contact Management, Sales Force Automation, Marketing Automation, Customer Service Automation

Inventory/Warehouse Management: Inventory Control, Lot Tracking, Serialized Inventory, Warehouse Management, Manufacturing Management

Project Management: Project and Job Costing, Service and Maintenance management,

Payroll: In-house Payroll, Electronic Funds Transfer (EFT), Direct Payroll, Sage Accpac HRMS

System Administration: System Manager, Alerts and Alerts Manager

Sage manages the processes that are common to all businesses, such as finance, HR, or CRM; the vertical modules give customers a greater ability to match technology to specific industry needs (Sage, 2010).

Microsoft Dynamics

According to Microsoft 2010, Microsoft Dynamics offer solution that can help fastrack performance, measure financial effectiveness and enhance decision making. It helps drive businesses by providing a backbone of an elastic system. It is easy to implement and adapt. Apart from on-premise installation, the solution can also be deployed to work with cloud computing, a solution some organisations are already considering.

The capabilities delivered by this solution includes Financial management, Supply chain management, business intelligence, performance management, Collaboration, Project Management, Human resource management, IT management and Software-plus-Services.

Open Source Software (OSS)

There are also a number of open source ERP software that seems to be of an increasing interest at the moment according to the research work of Johansson and Sudzina 2008. The list includes Compiere, OpenBravo, Opentaps, Facturalux, TinyERP.

It may be that most SMEs will find OSS ERP implementations able to cater for their needs since according to Raymond 2005, SMEs are highly flexible and adaptable to change. Implementation may also work out cheaper as costs associated with licensing fees are usually not incurred (Johansson and Sudzina, 2008). It should however be noted that support for implementations for OSS ERP software is quite hard, as there can be several versions of a given software and finding an expert can be daunting.

ERP Evaluation and Selection process

A successful ERP project requires selecting an ERP solution, implementing the solution, managing changes and examining the practicality of the system (Wei and Wang, 2004). Wrong ERP solution choice would either cause implementation to fail or weaken the system to a greater impact on the enterprise (Hicks,1995; Wilson,1994).

Most enterprises often jump into looking at ERP functions and features rather than examining the strategy and business processes. According to Donovan, 2001, it is important for management to know the current strategy, processes and supporting systems compared to what they could be with the new systems.

For most enterprises, the decision to implement ERP functionalities will require buying a software package from one of the more popular vendors on ERP market. But the selection process is not a straightforward task, hence thorough understanding of what ERP packages are to offer, differences in each of them and what might be at stake in selecting one package over the other should be well examined or evaluated, (Sammon and Adam, 2000).

Evaluating and selecting an ERP system, even though can be a very complex process (Donovan 2001). It should be a ‘fact-based’ process that will bring an enterprise to the point where comfortable & well-informed decisions can be made.

Figure 5 below shows an online poll conducted by ESI International survey of 2,000 business professionals in 2005. This clearly indicated that most software projects, ERP inclusive, failed due to lack of adequate requirements definition.

Fig. 5: Source: ESI International survey of 2,000 business professionals, (2005).

In addition to the above figure 5, Donovan pointed out that typical ERP project implementation can also fail because of a wrong choice of ERP solution. Therefore, Management Agility Inc in 2005 revealed that it is imperative to adopt a thorough evaluation and evaluation process before adopting any ERP solution in SMEs. Their report detailed eight steps necessary for a careful and reasonable level of successful ERP implementation in SMEs. This is represented in Figure 6. We have further categorised this into the following five stages for our discussion;

Planning, RFP, Solution Evaluation, Negotiation, Selection & Agreement

These five stages are explained below based on the research carried out by Management Agility Inc in 2005.

Stage 1 – Plan Requirement

Define business along with areas of business that require technical approach.

Develop a specific business case with business value for a solution.

Ensure that the project sponsor is willing to articulate the business case for change, identify vendors and get familiar with the available solutions.

Get general view of investment needed, considering software, hardware, other related infrastructure and ongoing support.

Evaluate the organisation readiness for the investment and decide whether to continue or not.

Define priorities under “must-have” and “nice-to-have” accordingly.

Stage 2 – Request for Proposals (RFP)

Shortlist interesting vendors based on the outcome of market survey for solutions and then for demonstration.

Collects facts in line with the business need from product demonstrations for the development of unbiased RFP for vendors.

Set-up a neutral body to develop RFP, using facts gathered from products demonstration aligned to the business requirements.

Distribute out RFP to selected vendors.

Generate basic expectations from ideal proposal in line with the business need for onward selection of the ideal software vendor.

Stage 3 – Solution Evaluation

Identify and prioritise remaining gaps between software capabilities as demonstrated and business requirements.

Identify how the gaps will be bridged in terms of configuration, process change or a combination of all these.

If the gaps cannot be bridge, then discontinue the evaluation exercise immediately, otherwise consider reengineering of those affected business processes and continue with the evaluation.

Stage 4 – Contract Negotiation

Negotiate with each vendor; establish software, hardware and other infrastructure agreement requirements, which include version, components, maintenance and support. Also negotiate participation in user groups, license costs, maintenance fees and many others.

Establish service provider agreement which also include deliverables, timelines, resources, costs, payment schedules and other legal requirements.

Stage 5 – Selection and Agreement

Upon successful negotiation with the right vendor;

Review all legal terms on privacy protection, operation guidance and data manipulation etc.

Approve agreements with the selected vendors.

Agree on implementation plan.

Fig. 6: Detailed flowchart for ERP Software, Hardware Evaluation and Selection Processes Management Agility Inc, 2005

ERP Software & Hardware (Solution) Evaluation and Selection Steps

Yes

No

Stage 4

Stage 3

Stage 2

Stage 1

Define Requirements

Shop Round for Product

Clarify Requirements

Evaluation Vendor Inquiry

Interact with Vendors

Negotiate Agreement

Action Agreement

Define business case/need and spell-out required values. Be specific. Ensure the business sponsor is willing to push through business case for change.

Look round the market for what product is available. Identify vendors that operates and their general approaches to technologies the take. Discuss with others in the same industry as you are etc.

Clarify your requirements and be sure of what you are looking for in line with you business case. Refine requirements if possible and be specific too.

Find out what product is looking promising in line with the business need and from which vendor. Identify which vendor and their products and invite interesting ones for demo etc. Request for proposal (RFP).

Invite each shortlisted vendor over for a chat and find out more about the product. List out expectations based heavily on business requirements.

At this point evaluate this approach. Can you afford to change your current process? Can you afford the change the new product will bring and many more?

Initiate Negotiation for the selected product with the selected vendor. Agree on who does what, when are they to be done. Negotiate deliverables, timelines, co