Universiti Teknologi MARA. The Impact of Implementation of ERP System in Business Environment in Klang Valley. Nurulsyahida Binti Hashim

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1 s'f.'^^^ Universiti Teknologi MARA The Impact of Implementation of ERP System in Business Environment in Klang Valley Nurulsyahida Binti Hashim Thesis submitted in fulfillment of the requirements for Bachelor of Science (Hons) Information System Engineering Faculty of Information Technology and Quantitative Science November 2005

2 DECLARATION I certify that this thesis and the research to which it refers are the product of my own work and that any ideas or quotation from the work of other people, published or otherwise are fully acknowledged in accordance with the standard referring practices of the discipline NOVEMBER 21,2005 NURULS YAHID A BINTIHASHM

3 ACKNOWLEDGEMENT AlhamduUilah, in the name of Allah, I would like to express my grateful to HIM for giving me patience and strength to complete this research. Without HIS bless, I would not be able complete this research. First, I would like to express a million thank you to my supervisor, Puan Rogayah Abdul Majid for her guidance and belief that I would actually get it done. Thank her for giving me ideas and support in assisting my research with high patience. Not forgotten, thank you to Prof Madya Dr. Noor Habibah Hj. Arshad for her guidance on the report writing. Also special thanks to the organizations and people who involved in this research. Last but not least, thanks to my parents and siblings for giving me motivation, moral and financial support. To my friends, thanks for sharing the worry and support me from back. Thank you. ui

4 ABTRACT Nowadays, business sector had evolved in Malaysia. Thus, many companies in Malaysia take initiatives to be world-class standard to which they start implementing the Enterprise Resource Planning (ERP) into their company. ERP systems are large, complex integrated software application that often takes times to implement. It also has the benefits to the companies. This research identified the problems in ERP system implementation. Other than that, the objectives of this research are to identify the benefits using the system and the factors that influence the successful of ERP system implementation. To achieve the objectives, the data and information are gathered from the interview that conducted with those companies that implemented the ERP system and review the previous research. The problems are focused on workers, project team and project management. Benefits of ERP system had been identified in terms of cost, time, customer services and easy information access. Meanwhile the factors for a successful ERP system implementation are project management, clear vision and objectives and project team. Those factors determine whether the ERP system implementation will be succeed or vice versa. IV

5 TABLE OF CONTENTS DECLARATION ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENT LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS ii iii iv v vii viii ix CHAPTER 1 INTRODUCTION 1.0 Introduction About Enterprise Resource Planning (ERP) Problem Description Project Objectives Project Scope Project Significance Conclusion 5 CHAPTER 2 LITERATURE REVIEW 2.0 Introductionof Enterprise Resource Planning (ERP) History of Enterprise Resource Planning (ERP) Defining ERP ERP System Characteristics ERP System in Malaysia ERP System Implementation Approach Issues of ERP Implementation 15

6 2.7 Issues of ERP Implementation 17 CHAPTER 3 RESEARCH APPROACH AND METHODOLOGY 3.0 Introduction The Research Approach Primary Data Secondary Data Summary 21 CHAPTER 4 RESULTS AND FINDINGS 4.0 Introduction Interview Result Companies Profile Problems of ERP Implementations Benefits Gained Factors of Successfiil ERP Conclusion 41 CHAPTERS CONCLUSION AND RECOMMENDATION 5.0 Conclusion Recommendation 43 REFERENCES 44 APPENDICES 50 APPENDIX A 51 APPENDIX B 53 APPENDIX C 54 VI

7 LIST OF TABLES Table 2.3: ERP2 Market Forecast (*) in Malaysia 12 Table 4.1: Summarization for problems in ERP system implementation 38 Table 4.2: Summarization for benefit in ERP system implementation 40 Table 4.3: Summarization for factors of successful ERP implementation 41 vu

8 LIST OF FIGURES Figure 2.1: A representation of ERP 8 Figure 2.2: Illustration of ERP 9 Figure 2.4: Contingency Framework for ERP Implementation Approach 14 Figure 2.5: A framework for ERP selection 15 Figure 3.1: A flow of research approach and methodology 20 vni

9 LIST OF ABBREVIATIONS ERP - Enterprise Resource Planning IX

10 CHAPTER 1 INTRODUCTION 1.0 Introduction The development of the new technology gives impact to the changing of the world business which it promises to save money and time and distributes a lot of benefits in business development and evolvement. It gives opportunity to the expert to gain profit and have a better place in the business. They also need to understand deeply the technology and their business needs in a more integrated manner. Other than that, they can compete in world wide business. This paper will discuss about the Enterprise Resource Planning (ERP) in detail and the benefits and problems within the ERP implementation. In addition, it will explain in detail about the benefits and problems that may occur within the companies that implement the ERP system and stated the factors that influence the successful of ERP implementation. 1.1 About Enterprise Resource Planning (ERP) An Enterprise Resource Planning (ERP) is suite of integrated corporate wide software applications that drives manufacturing, financial, distribution, human resources and other business functions in real time. From a technical point of view, ERP systems are based on a client/server architecture providing support to integrate business process across organizational functions. ERP software is a set of customizable and highly integrative real time business application software modules sharing a common database, which support core business, production and administrative functions, such as

11 logistics, manufacturing, sales, distribution, finance and accounting (Stefanou, 2000). In the past, organizations used separate applications to automate these business functions. What is different about ERP system is that they integrate across functions to create a single, unified system rather than a group of separate, insular applications. In other word, it integrates all departments and functions across a company onto a single computer system that can serve all those different departments' particular needs. They provide for both the core administrative functions, such as human resource management and accounting, as well as integrated modules which can be selected to support key business processes, such as warehousing, production and client management (Rosemann, 1999). ERP has its root in well-established Material Requirement Planning (MRP) systems that have evolved over the last quarter of a century. Many of manufacturers around the world have been using and implementing MRP and MRPII (Manufacturing Resource Planning) system to improve efficiency at specific levels of production. As data from the factory floor, warehouse or distribution center began to impact more areas of the company, the need to disseminate this data across the entire enterprise demanded that other business areas interoperate with the MRP system. However, since MRP systems could not fulfill the responsibilities, the MRPII systems had been develop to take the responsibilities, and next gave way to ERP development. ERP systems, today are considered to be "the price of entry for running a business" (Kumar and Van Hillegersberg 2000), and large growth in ERP implementation, especially among mid-sized and small-sized companies, are expected worldwide (Everdingen et al. 2000; Oliver 1999; Zeichick 1999). ERP strategies represent over 80% of new large-scale systems development projects, dominate the IT infrastructure in large

12 companies, and are becoming accepted as the standard approach in small and medium sized enterprises. 1.2 Problem Description Nowadays, global business environments are competing with each other in gaining their customer satisfaction who demands for effective and speedy solutions. For that reasons, those companies decided to implement Enterprise Resource Planning (ERP) system to pursue for their objectives. Without the ERP system, the business functions could be quite slow and could affect the business performance. However, there is still a doubt between companies to implement the ERP system due to the global issues. Theoretically, ERP system is said as big issues in the company's survival. If the ERP not conducted correctly, the whole system will become scrap and this will bring problems to the company. The cost of implementing the ERP system is very high and those companies are not confident to invest in the ERP system and afraid they do not gain any benefits that will eventually make their companies lost. That is why, a lot of companies neglect to implement the ERP system in their business. The company has to spend a lot of time and money and must make a very good decision to implement the ERP system. Unnecessary and wrong steps in making decision could affect the whole company business. If the companies fail in the early stage of implementing the ERP system it will affect the whole business functionality. Most companies that implement ERP system are faced with the dilemma such as upgrading the current system, buying new ERP system or communication with their employees regarding the new system adoption. The main implementation risks associated with ERP projects are related to change management (Holland et al., 1999).

13 1.3 Project Objectives The objectives of this research as stated below: To identify the problems that may occur during implementing the ERP system To identify the benefits of the using of ERP systems in business environment To identify the factors those influence the successful of ERP system implementation. 1.4 Project Scope The research will mainly cover on the impact of the implementation of the ERP system in business environment. This research also will identify the factors that influence the successful of the ERP system implementation. The focus field will be on digging out the problems that occur while implementing the ERP system and the benefits that the companies gained. The selection of the companies will be focused on Klang Valley. 1.5 Project Significance Somers, Nelson, and Ragowsky (2000) in their studies stressed that high failure rate of ERP implementation requires a better understanding of its CSF's. This study is proposed to act as a medium of communication or knowledge for organizations in Malaysia who intends to implement ERP systems or have already implemented ERP systems but are facing a lot of issues to be resolved. This research will identify the problems that may be occurred during the implementation of ERP system and give ideas to company's management how to manage with those problems.

14 Moreover, this research will contribute the benefits of implementation of the ERP systems and how it brings the successful feedback to the companies. So, the companies will have a confidence to implement the ERP system in their business. This research is to identify the best way to implement ERP successfully and give ideas to companies on how to conduct and control ERP system in order to make sure their business run smoothly. From this research, for those who would like to implement the ERP system would be able to understand the purpose of the ERP system. 1.6 Conclusion As a conclusion, this chapter is about the introduction of the research. It began with a brief description of the Enterprise Resource Planning (ERP) system. The problems which lead to do this research, followed by the project objectives, project scope and project significance. The main purpose of this chapter is to introduce to community of what this research all about.

15 CHAPTER II LITERATURE REVIEW 2.0 Introduction of Enterprise Resource Planning (ERP) Enterprise Resource Planning (ERP) systems are packaged (but customizable) software application, which manage data from various organizational activities and provide a fully integrated solution to major organizational data management problems. Due to increasing of competitive pressures between companies especially the big companies, had forced those companies to start implementing the ERP system in order to reduce cycle times and costs and to improve products and customers satisfaction. With ERP usage, allow an enterprise-wide view of business information. Enterprise Resource Planning (ERP) systems, today, are considered to be "the price of entry for running a business" (Kumar and Van Hillegersberg 2000), and large growth rates in ERP implementation, especially among midsized and small-sized companies, are expected worldwide (Everdingen et al. 2000; Oliver 1999; Zeichick 1999). Unfortunately, a significant proportion of ERP implementation projects do not succeed (e.g., Bingi et al. 1999; Ferranti 1998), often, because human aspects are "overlooked" (Mendel 1999) or "remain to be resolved" (Kumar and Van Hillegersberg 2000). 2.1 History of Enterprise Resource Planning (ERP) ERP (Enterprise Resource Planning) is the evolution of Manufacturing Requirements Planning (MRP) II. The history starts from year 1960s where at this time the system is for inventory management ad control. Inventory management and control is the combination of information technology and

16 business processes of maintaining the appropriate level of stock in a warehouse. The activities of inventory management include identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status. At year 1970s, the system had been upgraded into Material Requirement Planning (MRP). Materials Requirement Planning (MRP) utilizes software applications for scheduling production processes. MRP generates schedules for the operations and raw material purchases based on the production requirements of finished goods, the structure of the production system, the current inventories levels and the lot sizing procedure for each operation. The Materials Requirement Planning (MRP) then evolved into Manufacturing Requirements Planning (MRP II) in 1980s. Manufacturing Requirements Planning or MRP utilizes software applications for coordinating manufacturing processes, from product planning, parts purchasing, inventory control to product distribution. After that in year 1990s the existed Enterprise Resource Planning (ERP) replaced the MRPII. Enterprise Resource Planning or ERP uses multimodule application software for improving the performance of the internal business processes. ERP systems often integrate business activities across functional departments, from product planning, parts purchasing, inventory control, product distribution, fulfillment, to order tracking. ERP software systems may include application modules for supporting marketing, finance, accounting and human resources. 2.2 Defining ERP An Enterprise Resources Planning (ERP) encompasses a wide range of software products supporting the business operations and decision making. ERP software is multi-module application software that integrates activities

17 across functional departments, from product planning, parts purchasing, inventory control, and product distribution, to order tracking. Meaning that all departments can share, retrieve and view the information kept in the database. For example, when a salesperson enters an order in the field, the transaction can immediately flow through the other functional areas both within and external to the firm. This system contributes an enormous help in improving managerial and decision-making. Below is a representation of ERP in a simple meaning (Stefanou, 2000). Human Resources HR, Payroll Financial Resources 'AP/AR assets Customer / Billing / >^ Supplier Products/offerings Physical space Create and/or add value to products 1 1 Purchasing ; Inventory/catalog!, Logistic \ 1 \ (inbound, \ f ^ outbound),\ Industryspecific applications and goods t Figure 2.1: A representation of ERP Meanwhile, Peter Aiken (2002) defined ERP as a modern, integrative, technology based solutions that permit organizations to replace the disparate, legacy applications and stove-piped data and associated organizational inefficient that arise from the use of the disparate data and application. Peter illustrated the ERP as figure below.

18 itepteeiii! Logistics Ordering Flnarce pp.fp Applcation ^piication Ap :<icalic(i HR.'Pa>TDll.Applkaljon ' y,,. _,- "., /^,. t>1 Sp^ip-5i 0 Oata M Data lnlegrat9d_appllcallons HRfPaVToll!.siiarGd Dal Figure 2.2: Illustration of ERP According to Fergal Carton and Frederic Adam (2003), ERPs are designed for multi-site, multi-national companies, which require the ability to integrate business information, manage resources, accommodate diverse business practices and processes across the entire organization. Wood and Carlos (1999) found in their survey of 40 organizations having implemented ERP that the main reason to implement ERP was the need to "integrate the organizations processes and information". An ERP system is an organizational and management solution based on information technology towards challenges and problems in the business environment (Laudon et al. 1998). According to O'Leary, ERP systems are "computer-based systems designed to process and organization's transactions and facilitate integrated and real-time planning, production and customer

19 response" (O'Leary, 2000). ERP serves as an information backbone for a company's core business process (Frger, 2000; Campbell, 2000) 2.3 ERP System Characteristics The ERP has four characteristic which represent the ERP system. As Dr. Ali E. Kashef, Dr. Mahyar Izadi, and Dr. Saud H. Al-Sehali (2001) find in their research, the characteristic of ERP are as below: i. Client/Server System Enterprise Resource Planning systems depend on client/server technology, which enable the users to access the information from a central server. These enterprise applications typically reside on a server and provide users access at the PC level. They invite greater access to the non computer-literate end users. This concept has the ability to bring a systematic computerized power to the desktop. ii. Enterprise-wide Databases ERP has one database that serves all the application systems. These applications enable a company to automate almost every aspect of its operations by tying the ERP database to its intranet and extranet, and thus allowing full browser access to them. iii. Applications/Modules Each ERP vendor provides a number of ERP applications (or modules) for their systems. These are the functional software packages for each individual business unit like finance, human resources, order processing and so on (Stevens, 1997). Most ERP systems start with a set of core modules, and offer additional modules from which a company can select as desired. All these 10

20 applications are fully integrated to provide consistency and visibility for all the activities across entire system operation (Baan, 1997). However, ERP systems require users to comply with the processes and procedures as implemented in the individual modules. iv. WWW/ERF To accomplish communication among multiple computers a common software standard and a communication standard is needed. This issue has largely been solved by the existing protocols and standards of the WWW like Java and HTML. The ERP system collectively organizes a company's processes, communication systems, and management organization to make seamless software paradigm embedded in the WWW. 2.4 ERP System in Malaysia ERP2 market is forecasted (IDC, 2002) to grow steadily in Malaysia. ERP2 captured RM million sales in year 2000 and this is expected to grow to RM691.4 million by year This shows a steady growth of 59.9% from year 2000 to The breakdown of ERP2 market can be found in Table 2.2. Year * RM (million)

21 2004* 2005* Source: IDC, 2002 Table 2.3: ERP2 Market Forecast (*) in Malaysia According to George Chua, a Professional Services Group Manager, KarenSoft Technology Berhad, Penang, Malaysian ERP market trend adopts to the organization and not to the ERP system itself. In addition, there are fewer competitors in the market catering ERP for Small Medium Business (SMB), service oriented architecture, industry solutions, supply chain management, E-Business, outsourcing, decision support from technical to strategic focus and manufacturing to service sector. Companies in Malaysia are discovering that customizations are complex, time consuming, expensive, and make the system nearly impossible to upgrade. 2.5 ERP System Implementation Approach In Brown and Vessey (2003) in their research incorporates the potentially important ERP implementation variables such as top management support and project champion roles into preliminary contingency framework for their study. There are three steps need to follow. They first begin their study with an assumption that characteristic of the organization including industry and competitive strategy, will influence the ERP package capabilities that are sought by the organizations. The only published cross-organizational report known to the authors (Davenport, 1998) draws considerable attention to the need to think through the business implications of implementing an ERP system. After first calling attention to the "enormous technical challenges", Davenport concludes that disaster can result if a company fails to reunite the technological imperatives with the business needs of the enterprise itself 12

22 Second, Brown and Vessey (1999) said preliminary findings from the authors' own filed survey of ERP adoption decisions suggest that the ERP package capabilities sought can be summarized in terms of seven factors. There are new ways of doing business, IT cost reduction, data integration, flexibility/agility, IT purchasing, global capabilities and year 2000 compliance. Third, the organizational characteristics and ERP package capabilities sought are assumed to influence the ERP package choice and project scope (modules, business units, geographies). Brown and Vessey added that many other companies purchase so-called ERP packages for functions that support the value chain only. Further, some firms are implementing ERP modules with the expectation of enterprise-wide solutions, while in other cases the solutions are implemented at the division level or business unit level only. Finally, some enterprise-wide solutions are also global solutions. Brown and Vessey (2003) cited that some subset of variables for all three of these factors (organizational characteristics, ERP package capabilities and package choice and scope of implementation) are then expected to influence the key ERP implementation choices. Below is the framework for ERP implementation approach. 13

23 Organizational Characteristics T ERP Package Capabilities Sought ERP Package Choice and Project Scope ERP Impkmeataaam Acare^ith Top maaagemait ^'^ppoit CoE! io3inon aad ksdenhip of die jkoject taam ASeatios to disaga mmagemsat Usage of 3id-pa!ty cossultamss Msmjge eo3!iplexit>' by; -E-xieat of picseii iuatrvjitiou -Desree of p.?ckaga tkstotnjzatiea -CosweniiMi stotehv Figure 2.4: Contingency Framework for ERP Implementation Approach Research done by J. Stefanou (2001) concludes that the ERP selection process is illustrated in figure 2.5 below. Stefanou divided it into three phases which at phase one, it concern about the business vision. Effective IT/IS project implementation requires a clear business vision, which clarifies the organization's direction, the goals ad the business model behind the implementation of the project (Holland and Light, 1999). It has been argued that the first step in IT enabled process re-engineering is to develop the business vision and process objectives (Davenport and Short, 1990). At phase two, Stefanou placed the business requirements vs. constraints and the desire to change. He stated that the decision concerning the adoption of an ERP system has to be made according to both current and the future status of the enterprise, which is constrained by various technological, organizational and financial inefficiencies. The project team, consisting of users, managers and consultants should develop a detailed critical ERP functionality and enhancements requirements matrix, followed by list regarding the organizational and technological changes required for the successful implementation of the system (J. Stefanou, 2001). 14

24 At phase three, J. Stefanou (2001), is the ERP system selection and evaluation which this phase consists of the selection and evaluation of the appropriate vendor, product and supporting services to fulfill business needs. Certain characteristics, such as multilanguage and multicurrency capabilities can be the key drivers for selection of an ERP system (Bancroft et al. 1998). Fliase 1 Fhsise 2 PJi.i»se 3 Requirements Desire to Chanee Constraints Anafysis ERP Selection. 7^ iz: Evaluarion ROl/Valiie Figure 2.5: A framework for ERP selection 2.6 Issues of ERP Implementation Kelly et al. (1999) in his research stated that the issue concern is the planning phase of and ERP implementation project. He explained that the sale of ERP projects has rarely been tackled by most organizations highlighted by an inadequate organizational analysis at the beginning of the project. A good management of the ERP project is essential and play a very important role in determined the successful of ERP implementation. Wood and Pastor (2001) had find out in their research that the complexity of ERP market is one of the issues. The complexity of ERP 15