Indian SME s ready for Enterprise Resource Planning

Transcription

1 Are Indian SME s ready for Enterprise Resource Planning This white paper defines Enterprise Resource Planning [ERP] and elaborates its role in small and medium enterprises [SME s] in India today. This white paper also highlights the growth of ERP in SME s, benefits of ERP and conflicting issues and challenges faced by SME s in implementing ERP system within their business process. This white paper also examines the pros and cons of offline and online ERP. R Your Outsourcing Partner

2 CONTENT Evolution of ERP 01 Growth of ERP Software Industry 02 Implementing ERP in SME s 03 Challenges and Conflicts 04 Traditional [Offline] v/s. Online ERP 05 Conclusion 06

3 01 Introduction Evolution of ERP In any business organization there is a continuous flow of information between different processes which at times is very complex. To eliminate the complexity, organizations both large and small have reverted to using Enterprise Resource Planning [ERP] software that facilitates a smooth flow of information. ERP is also instrumental in enabling the flow of information between several organizational units by overcoming geographical boundaries. ERP software provides competent authorities in an organization with an extensive overview of the project in a manner that is not only reliable but also timely and consistent. ERP acts as a foundation to an extensive information system that revolves around a fundamental database that acquires and serves data into applications that function under a regular computing platform, thereby regulating business processes into a unified environment The evolution of ERP can be traced to the system that was in use earlier which was Manufacturing Requirement Planning [MRP II] system. Now this system incorporated massive information across manufacturers, vendors and customers with the help of extensive LAN, WAN and Internet networks. Needless to say, the MRP II is an enhanced version of Material Requirement Planning [MRP] system. However, the MRP II had its own share of shortcomings. One of the biggest drawbacks of the MRP II system was that ERP MRP II was structured around functional parameters that a particular application was bound to gratify. ERP is a full-fledged trade management solution that encompasses operational areas of a business like finance, production, accounting, logistics and human resources. It structures and incorporates flow of information and operational procedures with an objective to optimize the use of critical resources such as manpower, mechanical appliances and liquidity. ERP also assures: single database single application single user interface for the whole enterprise where earlier different systems were required for different aspects such as manufacturing, distribution, sales and finance It was unable to efficiently incorporate the various operational processes along with the available resources. Traditional application systems largely deployed by organizations considered every transaction as individual transactions. ERP on the other hand, considers every transaction as a single transaction by inter-connecting it with the different processes that constitute a robust business.

4 02 Growth of ERP Software Industry Several factors were instrumental in driving the growth of enterprise software market. In this context, it is a known fact that exhaustive information architecture enhances the performance of a business. Conforming to market trends it is evident that when a SME adopts ERP software, it immediately comes to the attention of their competitors who in turn waste no time in implementing ERP software within their business processes with a view to improve their own competency levels. Further, there has been marked change in the use of packaged applications. This can be attributed to the fact that the European Union adopted a single currency which prompted organizations to substitute legacy software with packaged software. This substitution was executed successfully by outsourcing the task to vendors offering ERP software. Moreover, several organizations were discarding legacy software owing to the strain of ecommerce and difficulties in the front end pertaining to front office applications and issues of conflict in the back end pertaining to linking with suppliers and business partners. In addition, the materialization of vertical applications based on ERP software that specifically addressed industry specific requirements led to a large number of organizations to adopt ERP software. At the same time, large scale developments in IT and software arena in conjunction with the volatile progress of internet and internet applications caused many organizations to remodel their existing business protocols by adopting enterprise resource planning software. The scope for ERP software in India is tremendous. Market predictions portray a growth in ERP software market at an enhanced rate of 22.2 per cent spanning an extended period from IDC reports forecast the spend on ERP software over the said period at an estimated cost of Rs.2,000 crore [about $400 million]. The growth of ERP software amongst SME s is projected at a compound annual growth rate [CAGR] of 19.4 per cent from ERP in Small and Medium Enterprises India s economic development has been extensively supported by SME s. SME s in India comprise of around 30 million units and have been instrumental in contributing 17 per cent to national GDP in Further, SME s in India are responsible for providing employment to a large number of people. As of now, Indian SME s provide employment to around 60 million people. Since early 1990 s it has been largely observed that ERP s have been widely embraced by small and medium enterprises [SME s]. ERP offers a unique solution to SME s with an objective to enhance their output, competence and their overall business performance. In order to successfully achieve these facets, SME s have understood the underlying importance of implementing ERP software within their business processes. At present, 60% of India s gross domestic product [GDP] is largely contributed by SME s. Owing to the tremendous growth of SME s, ERP vendors are now diverting their focus on SME s. Their strategy for attracting SME s to use ERP software is by providing economical and customized ERP software to SME s. It is also a well known fact that SME s in India mainly contribute to generating large scale employment opportunities, employing around 30 million people and operating around 12 million units. However, it is also noticed that a large number of SME s face sizable resource constraints. It is also worthwhile to mention that most Indian SME s fail to notice the inherent benefits of adopting enterprise software within their business processes by citing monetary constraint. They fail to see the big picture offered by ERP which is, ERP can make a marked difference to an SME s overall performance. For SME s to whole-heartedly adopt ERP software it is necessary to drive home the point that ERP can sizably increase operational efficiency, enhance resource productivity and lastly to decrease fixed and variable costs.

5 03 The worldwide IT spend on enterprise software is as high as $335 billion in Out of which the share of India is minimal to say the least. The figure below depicts yearly worldwide IT expenditure on ERP software Graph Source: Though several small and medium enterprises come into existence every year, a critical aspect about these SME s is that out of the total number of SME s that take shape each year, half of them shut shop within the first three years of their formation itself. Another statistic reveals that only 40% of these SME s manage to survive beyond a grueling ten year period. The reason being that the focus of most of such SME s is to survive, rather than establishing a sound long term business strategy. As a result, they only tend to rethink their business strategy when they fail to achieve success with their existing business models as they don t match pace with the dynamically changing market. SME s that manage to succeed are companies that are willing to take risks and adapt to market fluctuations. SME s are loathsome to risk hence; they are more eager and upbeat about integrating ERP within their functional processes for a multitude of reasons4. Such as Most SME s have MNC clients who require SME s to adopt and implement ERP to enhance their service delivery. A growing need to keep up with the competition. To acquire a competitive edge and mould themselves as per the fluctuating market dynamics.

6 04 Benefits of ERP By integrating ERP system within their business processes, SME s would be able to establish a robust transactional process that enables a regimented method to conduct business. This in turn would facilitate SME s to enhance and optimize their overall business productivity. Prominent vendors like SAP, Microsoft, Oracle, PeopleSoft, J. D. Edwards, Baan etc., offer premium ERP software packages and are continuously in the process of augmenting their customer base by targeting SME s. These organizations have come up with ERP packages that are customized to meet the requirements of SME s. Some of the common benefits of integrating ERP systems within their business processes include:- Decrease in planning cycle time Decrease in manufacturing cycle time Decreased inventory Decreased ordering errors Decreased manpower requirement Facilitates a faster turnaround time in adopting to market fluctuations Enhanced resource utilization Marked improvement in customer satisfaction levels Facilitates global outreach Implementing ERP in SME s Integrating ERP systems into a business process will have a major impact on both internal as well as external operational procedures of an organization. Therefore, it is absolutely essential that an ERP system is successfully implemented and strategically executed to ensure overall organizational productivity and long term survival. Successful implementation of ERP system will culturally and structurally drive organizational change. Organizational change is facilitated by ERP systems owing to the robust business processes it offers.. Hence it is necessary that ERP implementation is considered from tactical, business and scientific magnitude. Implementation of ERP system is an amalgamation of business process transition and software configuration that lines up business procedures along with the software. Primarily, implementation of ERP in SME s follows two calculated approaches. On one hand, in the first approach an organization adopts a basic ERP version where they have to restructure their overall business procedure to conform to the functional parameters of the ERP that is crucial in transforming the way a business operates. The underlying value of this approach is that it harnesses the benefits of future upgrades and empowers organizations facilitates organizations to profit from excellent business procedures. On the other hand, the second approach enables organizations to adopt ERP systems that are customized to suit the requirements of their individual businesses. However, the inherent flip side to this approach is that it delays the implementation procedure and renders any subsequent software upgrade cumbersome and comparatively expensive. Hence, ERP vendors often recommend SME s to adopt the first approach and concentrate more on transforming their overall business processes. It has also been noticed that out of all ERP implementations, one third of them fail due to several factors. A factor that is largely responsible for failure of ERP implementation is when SME s consider it as a simple automation project rather than believing it as a project that relates to managing change. SME s also need to understand that ERP is a business solution and not an IT solution. Most organizations consider ERP as an IT solution which is where they falter. Hence, it is advisable that SME s adopt a strategic and planned approach while implementing ERP, with an objective to succeed. The figure below depicts ERP implementation in SME s

7 1 2 Change Management To what extent business process reengineering required? 3 4 Who will be suitable ERP Vendor? Whether consultant required? 5 6 Who will be in the ERP team? 7 8 ERP Implementation phase wise? Is ERP Needed? What training is essential? 05 Post Implementation Review 9 Image Source: Kale, P. T. SSB. Enterprise Resource Planning Implementation in Indian SMEs.; :1-7 Challenges and Conflicts While it is a well established fact that the market for ERP has witnessed a marked increase, there also exists a numerous set of conflicting issues and challenges that hamper large scale adoption of ERP in small and medium enterprises. Some such conflicting issues and challenges are Understanding: Most SME s don t have a proper understanding of the ERP system and are largely unaware about ERP applications, vendors etc. More often than not, they are ignorant about ERP systems as a whole and its functionalities. SME s that are aware about ERP consider it as some kind of enchantment that will absolve them of all their business conflicts. Beliefs: SME s largely believe that ERP is exclusively designed for large enterprises simply because of the fact that it requires large capital base for acquiring, implementing and maintaining and ERP system. Past Experience: On the basis of some instances where an SME has failed even after implementing ERP has left a bad taste in the minds of most SME s who have come to believe that ERP implementation is a waste of resources and might even result in going out of business permanently.

8 06 Approach to Implementation: As discussed above there are two approaches to implement ERP out of which the first approach is feasible. The first approach cuts down implementation costs comparatively. However, owing to traditional business models SME s prefer to adopt the second approach and customize ERP implementation which is rarely cost effective. The Cost Factor: Cost is another conflicting area that prevents SME s from integrating ERP within their business procedures as SME s are unable to allocate required funds to meet the ERP requirements. Managing Change: A crucial reason that leads to failure in implementing ERP is the perception of SME s. Instead of considering ERP as a medium to manage change, it is being considered as an automation project. Lack of Resources: Owing to their small size, SME s usually don t have an in-house IT team who can oversee the implementation of ERP. As a result, they have to depend on outside agencies for implementation which in turn contributes to incrementing the overall cost of implementation. Traditional [Offline] v/s. Online ERP Traditional ERP refers to software solutions that organizations acquire in the conventional manner wherein they approach a software vendor who physically visits the organization to understand the existing infrastructure and based on the infrastructure installs the relevant software after customizing it to suit the organizations business requirements for a prefixed cost. The costs also include monthly, half yearly maintenance and support services. That is not all, once ERP software has been installed it is the onus of the organization to deploy personnel who can master the intricate functions of the software. However, the singular advantage to traditional ERP is that all data is retained and handled within the organization by personnel who can be trusted. The flip side to it is that since it is handled by a single user, there is nobody else who can resolve issues of conflict as and when they arise. In such situations, organizations have to rely on vendors for extended assistance. On the other hand, online ERP or cloud based ERP system is one where the relevant software is not installed on the server of the organization needing ERP but rather it is hosted elsewhere, running on a secure server over the internet. The online ERP model obliterates the need for the software to be physically loaded on to an organization s systems. Rather it is licensed to be used from a remote location and accessed through the internet. In this case, the organization does not need to have the requisite infrastructure to install the software, undertake maintenance or up-gradation from time to time. Another advantage of cloud based ERP is that since it is hosted over the internet, it can also be accessed using smart phones or tablets. Furthermore, the organization does not face any hassles with regards to installation, maintenance or customization of the software and it facilitates the organization to concentrate on their core functional areas rather than divert their attention to the tools in use. The biggest advantage of a cloud based ERP is the cost factor. An organization that operates from multiple locations need not worry about installing the software at every location. A single ERP system can be easily accessed and used by different branches of an organization irrespective of their location.

9 07 Conclusion ERP systems provide a regimented method to the way business is conducted and offer an enhanced overview of the overall organizational functioning. The Indian economy is driven by SME s to a large extent. Globalization has shrunk the world and has exposed SME s to global competition. Hence, the need of the hour is for SME s to adopt ERP systems within their business processes not only to tackle competition but also to match pace with changing market dynamics. Just like ERP has been whole heartedly embraced by large organizations, it is high time for SME s to follow their footsteps. Though SME s seem inclined to adopt ERP systems, a proactive approach is required for successful ERP implementation. ERP systems have to be considered as business solutions instead of IT solutions. No doubt the market for ERP is witnessing an upward trend and the focus of vendors now lie on the SME sector, numerous issues of conflict need concrete resolution. First and foremost, ERP needs to be extensively promoted amongst SME s. Next, vendors have to provide ERP solutions that cater to the specific requirement of SME s. Another factor that is to be taken into consideration is the cost. The cost of ERP implementation needs to be significantly lowered. SME s on their part need to assess their existing IT infrastructure and outline its drawbacks and at the same time create a road map on what they want to achieve by implementing ERP within their business. Source 1. Mendelson H. ERP Overview.; 2000: An Overview of Enterprise Resource Planning (ERP). _ERP_.pdf. 3. Rana Basu PU. Factors influencing ERP implementation in Indian SMEs: An empirical analysis. Manag Sci Lett. 2011: Kale, P. T. SSB. Enterprise Resource Planning Implementation in Indian SMEs.; :1-7.

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