FACTORS FOR THE SELECTION OF ERP SOFTWARE IN THE LARGE MANUFACTURING COMPANIES: THE VENEZUELAN CASE

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1 FACTORS FOR THE SELECTION OF ERP SOFTWARE IN THE LARGE MANUFACTURING COMPANIES: THE VENEZUELAN CASE Natalia CASTRO, Ana María BORGES, Nancy BAQUERO, Simón RODRIGUEZ, Eduardo SUZIN Departamento de Procesos y Sistemas, Universidad Simón Bolívar Caracas, Venezuela ABSTRACT Although the market for ERP (Enterprise Resource Planning) systems in developed countries is saturated by the large manufacturing companies, there are many possibilities for its implementation in Latin America. Considering that companies need elements to help them select the best software to support business processes, we propose a list of factors, which companies in Venezuela should consider when making a decision on ERP software. Later, this list is hierarchically ordered and becomes a formal tool for software selection, so that the company does not assess inappropriate or insignificant factors when choosing the application to be purchased. The study was carried out by means of surveys of Venezuelan firms that had already implemented ERP software in order to analyze their experience with this type of software. Once determined, the factors were hierarchically ordered to establish criteria for the software selection. Finally an analysis was conducted of the main selection factors determined in this study. ERP SYSTEMS An ERP system consists of a set of managerial tools to support the decision-making process, facilitating relationships between customers and suppliers in the supply chain, and increasing integration among the functional areas of the company (marketing, finance, manufacturing, operations, logistics, procurement, product development, sales and human resources), aimed at making it possible for the business to operate with high levels of productivity and consumer service and reducing the company s costs and inventories. [1] The ERP system comprises all transactions that take place within the organization which result in a large database. This information, if properly managed, analyzed and disseminated, can be highly valuable since it offers competitive advantages. Therefore, understanding the organization as a system of knowledge management is an approach that can result in considerable strategic profits for the company. [2] This knowledge management system is based on software and the fact that every application that is adopted and used makes the difference between one competitor and another. This application should be understood as a tool to facilitate the implementation of a business strategy that will determine the goal of the business and how and when it will be implemented. [3]. Problem Posing Purchasing ERP software is a critical and strategic task since this software will completely replace the previous information system, and becomes the basis for building other inter- and intra-organization information systems. [4] Moreover: 1. Its costs in terms of purchase, training, implementation and upgrading are very high. 2. The company must assume the opportunity costs derived from staff training in ERP modules, the time they spend on the transition, assimilating the new technology and making the changes in the organizational culture required by this type of technology. 3. It competes in terms of significance with the first priority of the company: an ongoing business. 4. All the employees must be highly motivated by the project for its successful implementation. 5. All functional and process units of the business depend on ERP which involves a risk. These elements lead to the conclusion that purchasing ERP software requires great care and a selection process that is as effective, efficient and formal as possible. [4] SELECTION OF ERP SOFTWARE Once the company has studied its long-term strategies and goals and has made the decision to purchase ERP software as a tool to achieve those goals, the next step is to select the software and the provider that are most convenient for the organization. The first step in the selection process consists of studying the company s requirements, i.e. researching all the business processes to redefine needs and identify which modules the company needs to include in the software. Once this process is completed, the ERP software is selected using techniques such as the short-list route, which comprises the following steps: [3] 1. Get to know the packages offered by various software firms through: search in the Internet, contact with colleagues, consultants and associated industries that have implemented similar software, research in specialized magazines, and visits to supplier presentations.

2 2. Produce a short list (10-15 packages) with the suppliers that generally cover the company s requirements. 3. Reduce the list according to criteria such as functionality, approximation of implementation, costs, credibility of the company, experience, support, reputation, responses to questions made and vision of the organization. 4. Select the software by making an in-depth study of the supplier, products and service. The people who will be working on the implementation and use of the system have to be involved in the decisionmaking process to create a feeling of belonging and ownership. [1] [3]. Factors for selecting the ERP software A factor is understood as an element or cause that together with other elements or causes contributes to produce an effect. Companies should consider these factors when selecting the ERP software. If these factors are not satisfactorily covered by a supplier, other alternatives should be considered. Gathering of information Once the basic structure of the ERP systems was understood, information was gathered on the factors considered for selecting the software to support the systems. After a considerable number of consultations with professors in the Processes and Systems Department at Simón Bolívar University, reviewing papers on the purchase and implementation of ERP applications [5][6][7], and based on the following selection criteria: - factors considered as indispensable by the authors of the papers. - common factors found in the studied papers. the selection factors listed below were chosen. List of selection factors of ERP software Factor Description 1 Exchange rate Cost of the software (purchase and 2 implementation costs) 3 Purchase cost/implementation cost ratio 4 Software upgrading cost 5 Benefits vs. Investment (ROI) 6 More customer satisfaction 7 Software internationality 8 Market positioning of the supplier 9 Supplier financial soundness 10 Supplier size 11 Stability of the supplier product Number of customers covered by the 12 supplier 13 Higher organizational flexibility 14 Improvement of organizational structure 15 Better application of a managerial style 16 User friendly, easy to use 17 Implementation time 18 Training required for the employees 19 Human resources required for the implementation Factor Description 20 Reluctance to changes by employees, managers, directors 21 Top management commitment 22 Duration of the shortest cycles 23 Processes improvement 24 Implementation of the desired business processes 25 Adaptability to the company s processes 26 Availability of solutions for the business areas 27 Guide for model company (controlling company) 28 Improvement of innovation capacities 29 Know-how increase 30 Customer and supplier requirements 31 Improvement of e-commerce support 32 Improvement of Internet services 33 Communication with customers and suppliers of the company (SC) 34 Reengineering required for the business processes 35 Knowledge of the required business processes of the company 36 More transparency and smoother information flow 37 Software successfully proven 38 Software adaptability and flexibility 39 Modular architecture software 40 Operative system independence (independent platform) 41 Availability of tools for adjustment to software 42 Ergonomic software 43 Technological resources required for implementation 44 Support by the supplier, training capability, response to problems Adaptability to hardware and software 45 already existing in the company System capacity consistent with 46 company goals 47 System capacity consistent with the company s potential growth 48 The system is flexible to absorb future

3 changes in the company The system contains the modules 49 required for recording the company s day-to-day operations 50 The system is modular, with components 51 The software is scalable 52 The software is based on a vertical industry 53 Source availability to incorporate modifications by the user 54 Modifications by the user when the source is not available 55 Security of data, database, processes. 56 Greater reliability However, after a second revision of the list of factors, it was found that some of them did not belong to the selection process as such, but rather to the processes of: definition of the company requirements, appraisal of business processes, and establishment of the vision of the company (steps prior to the short-list route, see previous section). Consequently, the following factors, grouped according to four criteria, were excluded Factors excluded because they correspond to some of the following criteria 1. Appraisal of business processes: 21, 20, Vision: 13, 28, 29, 14, Requirements: 35, Factors similar or equivalent to 36, 38, 43, 19, and 46: 48 38; 25 38; 41 43,19; 23 36; 39 50; Based on the final list of factors, a survey was conducted in which every factor was classified as follows: Vital, Very important, Important, Little importance, Irrelevant. The survey was applied to 21 Venezuelan companies considered within the range of large corporations: those natural persons or legal entities with a yearly average payroll over 100 employees and a yearly turnover higher than 250,000 tax units (U.T. in Spanish). [8] The companies should have previously implemented an ERP program, in order to identify the main factors for the purchase of this type of applications, taking into account their experience in the selection of these programs. ORGANIZATION INTO A HIERARCHY OF THE FACTORS After completing the list, the factors were organized according to priority, otherwise some applications could cover the same number of factors and there would be no formal discrimination tool. The first step towards the hierarchical organization consisted of searching the percentage of companies that selected each of the options and organizing them on a decreasing scale according to the percentage result of the option Vital. [9] In relation to question 55 (data security): 76% of the interviewed companies answered that it was a vital factor, 24% said it was very important, 0%, important, 0% little importance, and 0% of the companies considered it was irrelevant. The same procedure was carried out for all of the factors. The table below reports the results: Factor Description Vital Very important Important Little importance Irrelevant 55 Security of data, databases, processes 76% 24% 0% 0% 0% 56 Greater reliability 67% 33% 0% 0% 0% 47 System capacity consistent with the company s potential growth 60% 30% 10% 0% 0% 44 Support by the supplier, training capabilities, problem response 54% 39% 7% 0% 0% 46 System capability consistent with the company s goals 51% 32% 17% 0% 0% 49 The system contains the modules required for recording the company s day-to-day operations 54% 43% 3% 0% 0% 37 Software successfully proven 49% 44% 7% 0% 0% 36 More transparency and smoother information flow 45% 41% 14% 0% 0% 6 More customer satisfaction 41% 42% 17% 0% 0% 16 User friendly, easy to use 41% 42% 17% 0% 0% 38 Software adaptability and flexibility 40% 50% 10% 0% 0% 45 Adaptability to hardware and software already existing in the company 39% 36% 16% 8% 1%

4 18 Training required for the employees 37% 39% 22% 2% 0% 5 Benefits vs. Investment (ROI) 31% 55% 11% 3% 0% 39 Modular architecture software 24% 63% 11% 2% 0% 11 Stability of the supplier product 21% 44% 29% 3% 3% 33 Communication with customers and suppliers of the company (SC) 20% 43% 28% 8% 0% 1 Exchange rate 19% 52% 27% 0% 1% 7 Software internationality 15% 48% 18% 18% 1% 42 Ergonomic software 14% 49% 33% 3% 1% 50 The system is modular, with components 14% 56% 25% 3% 1% 2 Cost of the software 13% 48% 36% 3% 0% 32 Improvement of Internet services 8% 51% 19% 19% 3% 31 Improvement of e-commerce support 0% 56% 28% 13% 3% 54 Modifications by the user when the source is not available 30% 24% 31% 15% 0% 22 Duration of the shortest cycles 32% 30% 38% 0% 0% 26 Availability of solutions for the business areas 25% 41% 34% 0% 0% 43 Technological resources required for implementation 26% 41% 31% 3% 0% 10 Supplier size 23% 30% 36% 6% 5% 51 The software is scalable 22% 35% 40% 3% 0% 53 Source availability to incorporate modifications by the user 15% 41% 31% 12% 1% 9 Supplier financial soundness 8% 43% 37% 9% 3% 40 Operative system independence (independent platform) 8% 47% 35% 10% 0% 27 Guide for model company (controlling company) 8% 37% 42% 12% 2% 19 Human resources required for the implementation 28% 17% 50% 6% 0% 3 Purchase cost/implementation cost ratio 21% 23% 51% 6% 0% 4 Software upgrading cost 20% 32% 48% 0% 0% 12 Number of customers covered by the supplier 17% 20% 46% 17% 0% 52 The software is based on a vertical industry 10% 23% 52% 8% 8% 8 Market positioning of the supplier 8% 32% 48% 10% 3% 17 Implementation time 15% 24% 53% 9% 0% This order was based only on the percentage resulting from the answer with the description Vital. However, since the percentages corresponding to the other answers have also to be taken into account, each description (Vital=V, Very important=mi, Important= I, Little importance= PI, and Irrelevant= Ir) was assigned a score (5=V, 4=MI, 3=I, 2=PI, 1=Ir) that was multiplied by its respective percentage. The example below illustrates the calculation for question 55. Score = (0.76 x 5) + (0.24 x 4) + (0 x 3) + (0 x 2) + (0 x 1) = The hierarchical organization of the factors is presented below: Hierarchical organization of the 41 factors Factor Description Weighed score 55 Security of data, database, processes Greater reliability System capacity consistent with the company s potential growth 44 Support by the supplier, training capability, response to problems 46 System capacity consistent with company goals The system contains the modules required for recording the company s day-to-day operations 37 Software successfully 4.429

5 proven More transparency and smoother information flow 6 More customer satisfaction User friendly, easy to use Software adaptability and flexibility Adaptability to hardware and software already existing in the company 18 Training required for the employees Benefits vs. Investment (ROI) Modular architecture software Stability of the supplier product Communication with customers and suppliers of the company (SC) 1 Exchange rate Software internationality Ergonomic software The system is modular, with components Cost of the software Improvement of Internet services Improvement of e- commerce support Modifications by the user when the source is not available 22 Duration of the shortest cycles Availability of solutions for the business areas Technological resources required for implementation 10 Supplier size The software is scalable Source availability to incorporate modifications by the user 9 Supplier financial soundness Operative system independence (independent platform) 27 Guide for model company (controlling company) Human resources required for the implementation Purchase cost/implementation cost ratio 4 Software up-grading cost Number of customers covered by the supplier The software is based on a vertical industry Market positioning of the supplier Implementation time This table presents the hierarchical order of the selection factors according to the experience of Venezuelan manufacturing companies. This order is helpful as a tool for establishing and requiring certain ranges and parameters of the main selection factors from the software suppliers, and for identifying who has the highest standards among the software offered. THE FIVE MAIN FACTORS: 1. Security of data, databases and processes: According to the order in the table, data security is the factor that should be most carefully analyzed by the companies before the purchase of an ERP program. This is consistent with some papers dealing with ERP flaws related to security. The problems include cases of access to critical upgrading functions of the basic parameter of systems and programs and changes in databases; experienced users can obtain the password file. Companies must then assess the antivirus basic system and firewalls to detect and prevent intruders from accessing. However, it is worth mentioning that it is almost impossible to find a program that provides 100% safety for data, databases and processes. [10]. Policies should be implemented within the company on access to information to mitigate this kind of risk. Firewalls and antivirus are not enough, but if welldefined safety standards are in force in the company, the risk of problems will decrease. 2. Greater reliability: This factor is critical for preserving the competitive advantage of any company and ensuring a positive experience for end users. If the application is not capable of handling data overload at any given time, the company will not have confidence in optimizing the response to the market. 3. and 4. System capacity consistent with the company s goals and potential growth: This factor should be carefully analyzed since it must be consistent with the company s strategy over the next years. According to this strategy, the system should be capable of easily handling new production lines and avoiding problems resulting from processing new data.

6 5. Supplier Support: When a new information technology is purchased, the customer depends on the supplier since its employees need to be trained in the new software, support is required for the implementation phase and for any future problem. The supplier has to be accessible and the customer has to ask questions such as: Who is appointed as consultant and project manager? Where are its offices located? What is its experience in the software and its applications? How many hours are established for support via telephone at the help desk? What subjects are covered? Do they provide support out of office hours? If problems are not solved, who should the company turn to (the hierarchical line)? How have other customer appraised the service rendered by the supplier? [3] REMAINING FACTORS: Although the five main factors were covered in the last section, this does not mean that the others should not be assessed. Even though they are not considered as vital, they are important for the selection of ERP software. It is surprising to find that implementation time is the last factor in the list, since the longer the company takes to implement the system, the longer it will take to achieve a return on the investment, reduce costs and gain the employees confidence in the system. In this regard, planning and implementation of an ERP system for a business unit should take more than a year but never more than two years. Eighteen months is considered a suitable time. [1] 80% 70% 60% 50% 40% 30% 20% 10% 0% What is the optimal period of time for ERP implementation? Study PM P Research 2001(UK) 6 meses- 2 años 6-12 meses Time 3-5 años > 5 años Chart 1 Source: PMP Research. ERP - Full survey synopsis. August, 2001 Chart 1 [11] shows how most organizations in England would prefer less than 2 years for the implementation of the system, although experience tells that most companies have a range of 3 to 5 years. Only 4% of the sample is prepared and willing to accept a period longer than 5 years. The Venezuelan case study shows that more than 50% of the companies needed more than two years for implementing the ERP software, while 33.3% needed more than 5 years (Chart 2). Chart 2 35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% Softw are selection and implementation time 33,3% Más de 5 años 22,2% Entre 2 y 5 años Time 27,8% Entre 1 y 2 años 11,1% M enos de 2 años This implementation time is too long. The inefficiency of the process could be the result of factors such as: Lack of a well-defined schedule of daily implementation activities. The company assigns low priority to the project. Lack of knowledge of the opportunity costs. Low level of training in ERP systems (both top management as project leader and surveillance committee). Poor support by the software supplier. Software requirements are badly defined. The software has to be customized. Lack of knowledge of the company s internal processes. CONCLUSIONS - Although a company has to consider many factors when making such an important investment as purchasing ERP software, this work concentrates on those that were considered important in previous studies and research, as well as identifying a manageable number of factors. Otherwise, there would be so many elements to study that the company could get lost in the process of finding the best selection. - When the survey of Venezuelan companies was conducted, the significance of the factors selected was demonstrated because no single factor reached a high percentage in the descriptions irrelevant or little importance. - The hierarchical organization of the 41 factors helps companies to judge criteria for the purchase of ERP software. The proposed order is significant

7 because it gives companies a formal resource for establishing factors that would perhaps not have been considered important for the purchase of the application. - Finally, the order of the factors serves as a basis for the construction of a mathematical model for the selection of ERP software. REFERENCES [1] Wallace, Thomas; Kremzar, Michael. ERP: Making it happen. John Wiey & Sons, Inc [2] Kapp, Karl; Latham, William; Ford-Lathan, Hester. Integrated Learning for ERP Success. APCIS Series on Resource Management. CRC Press [3] Harwood, Stephen. ERP: The Implementation Cycle. Computer Weekly, professional series. Butterworth-Heinemann publications [4]. Franch, Xavier. Pastor, Joan. On the Formatisation of ERP Systems PROCUREMENT. Universidad Politécnica de Cataluña. España [on line]. Available at: [5] Sarkis Joseph; Sundarraj R. P. Factors for strategic Evaluation of Enterprise Information Technologies International Journal of Physical Distribution and Logistics Management. Bradford, [6] Hong, Kyung-Kwon; Kim Young-Gul. The critical success Factors for ERP Implementation an Organizational fit Perspective Graduate School of Management, Korea Advanced Institute of Science and Technologies (KAIST). Seoul, South Korea. [7] Aveledo, Marianella. Aproximación metodológica para la migración de sistemas heredados al entorno web Master s Thesis on Software Engineering. Universidad Politécnica de Madrid. Faculty of Information Technology. December [8] Borges, Julio. Pequeña y mediana industria. Últimas Noticias Newspaper. August [On line]. Available at: 8/p12n1.htm [9] Bernroider, Edward. Koch, Stefan. Differences in Characteristics of the ERP System Selection Process between small or medium and large Organizations. Proc. of the Sixth Americas Conference on Information Systems (AMICS 2000). Long Beach CA [10] Mann, Paul. Safeguarding ERP Data: best Practices needed, say Experts. MSI Magazine. Feb [11] PMP Research. ERP - Full Survey Synopsis. August, United Kingdom. [On line]. Available at: