Critical Factors of ERP Implementation in Nation s Small and Medium-Sized Enterprises

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1 Critical Factors of ERP Implementation in Nation s Small and Medium-Sized Enterprises DONG Demin School of Economic and Management, ShaoXing University, P.R.China, ddm6411@163.com Abstract Previously, ERP system is mainly implemented in large enterprises rather than small and medium-sized enterprises (SMEs). In recent years, many SMEs start to implement ERP system in the context of globalization, intense competitions and the demand of continuous developments, however the implementation has met various kinds of difficulties, the success rate is very low. Through literature review and a Chinese nation s SME case study, this paper found out four types of critical factors for ERP implementation in nation s SMEs, including exterior circumstance factor, interior management factor, personnel factor and technique support factor. Keywords ERP, Small and Medium-sized Enterprises, Implementation, Critical Factors 1 Introduction The term enterprise resource planning (ERP) was first put forward by the Gartner Group Inc. in IT Glossary in the early 1990s. The Eleventh Edition of the APICS Dictionary defines ERP (enterprise resource planning) as a framework for organizing, defining, and standardizing the business processes necessary to effectively plan and control an organization so the organization can use its internal knowledge to seek external advantage. This definition highlights the broad applications scope of ERP framework. It is an accounting-oriented information system, mainly used to conform and plan the resources to meet the customer s orders, and the resources for procurement, production and distribution to improve the efficiency of the enterprise and to reduce the cost [1]. Small and medium-sized enterprises (SMEs) is a concept opposite to large enterprises, owing to different economic development conditions, the definitions of SMEs in different country are also different. The definitions of SMEs are changed for several times in China, at present, different standards are applicable to different industries. In industrial enterprises, the definition of SMEs: number of employees is below 2,000 or sale sum is below 300 million Yuan or total capital is below 400 million Yuan, among which, medium-sized enterprises must employ above 300 employees, sale sum above 30 million Yuan, total capital above 40 million Yuan, the rest is small enterprise [2]. ERP projects are mainly adopted in larger organizations. Its features and business process flow have been designed based on practices in the large organizations. Consulting and project management methodologies are normally specified based on such experiences. The needs, operating requirements, logistics fulfillment and financial capabilities of the SME manufacturers are different from that of the large and medium sized manufacturers [3]. Facing competitive globalization market and the continuously demand of self-development; many SMEs have already started to implement ERP system. They meet various difficulties in the process of implementation and the success rate is very low, which consumedly frustrate the confidence of SMEs to implement ERP system. Through relative literature review and the tracing of the implementation status of ERP system in one Chinese nation s SME for nearly three years, the paper tries to find out some critical factors for ERP implementation in nation s SMEs. Marsh [4] (2000) examines the implementation of ERP systems in small and medium-sized enterprises in South East Queensland, Australia based on nine cases, and has identified the following key success factors, including cross-functional team approaches, organizational experience of similar scale IT or organizational change projects, and deep understanding of the key issues relating to ERP implementations. He also identifies the following factors relative to the failure of the implementation, 166

2 including top-down or consultant driven implementations, IT department driven implementations, or implementations where the ERP is seen as a quick technological solution to solve the operation problems of the firm, rather than as a strategic investment. Huin, Luong and Abhary [5] (2002) researches 30 small and medium-sized manufactures (M-SMEs) in Southeast Asia, and indicates that similar to the deployment of manufacturing information systems, the need to fully comprehend the operational dynamics of M-SMEs is crucial for the successful implementation of ERP systems to manage the internal supply chain. The deployment of ERP systems in M-SMEs is simpler in some aspects compared to large corporations, but can be more complicated in others. Loh and Koh [6] (2004) researches the implementation of ERP systems in SMEs in eight manufactures in the UK, and indicates the implementation of ERP systems in SMEs has been increasing rapidly over the last few years. It is important to recognize the elements for a successful ERP implementation in these cases, which are formed by critical success factors, critical people and critical uncertainties. Dai and Liu [7] (2005) proceeding from the idiographic situation of SMEs, aiming at their business feature and problems existing in the management, analyzes the key factors for SMEs to implement ERP system are changing management pensee, business flow reengineering, data management, personnel training. Liu and Hu [8] (2006)puts forwards combining the internal need of standardization of ERP system and the dynamic or uncertain feature of SMEs, assorting with standardization and individuation as the key problems to implement ERP system in SMEs. Chen [9] (2007) indicates critical factors for ERP implementation in SMEs are personnel training, basic establishment and basic data construct. 2 Background Of ERP Implementation In HS Company HS company (to protect business secret, HS is alias) is established in 1998, its main product is peroxide, belonged to fine chemical industry, about 85% of the company business is international trade, the company owns four subsidiary independently accounting companies, and it employs about 700 employees. The company has build a local area net (LAN) with one serve and more than 70 personal computers. It owns one set of finance software, a tax reporting software, a mail management system and other office software. The company appoints one employee to exclusively take charge of the maintenance of hardware equipments. The company s finance department mainly uses two modules, general ledger and report forms; and uses MS-Excel to dispose the account of wages. Its sale and supply department contact customer and supplier mainly by mail system. The company s production plant, warehouse and other dept. mainly use MS-Office or handwork to transact information management. The company leaders decide to make further efforts to implement the informationization process at Jan., The main goal of ERP implementation is to enhance account management, achieving internal supply chain management, human resource management and manufacturing cost management. In the three years implementation, the project has met various difficulties, and improved slowly. Strictly speaking, the project fails. The following text, combined with the analysis of this case, studied the critical factors for ERP implementation in nation s SMEs. 3 Critical Factors For ERP Implementation In Nation s SMEs 3.1 Exterior Circumstance Factor Since most nation s SMEs are assistant manufacturers of large corporations, and have limited resources, large clients or their competitors and government policy will easily influence their business. Their business is dynamic and fluctuates largely, and often stops production, turns products and breaks out overtime; these events can influence the implementation of ERP system directly. To a slight degree, these events might lead to the reprocessing or delay; to a severe degree, they would lead to the termination of the project Influence Of Large Clients Or Competitors The implementation of ERP in HS Company meets similar problems. Soon after the company 167

3 stated up the project and trained its personnel for ERP principles, it conflicted with a foreign competitor in market. By transacting, the foreign competitor purchased one main product of HS Company and set up a foreign individual proprietorship company. This event influenced the implementation of ERP project directly in two aspects: one is product changes, the company needed time to develop new product and to reset basic data and parameters in ERP system since one main product was sold; the other is in human resource aspect, many trained members with high information diathesis were stole by foreign company, what s worse, the project manager and the finance manager were also transferred to the foreign company, the general qualification of the management personnel of HS Company declined. However, there is still one positive influence: the foreign company introduced ERP system from its mother company and finished the implementation speedily; this event greatly moved the managers and employees of HS Company Influence Of Government Policy China enacted new policy of export rebate, the export rebate of 553 products which is high energy-consuming or high pollution or resources would be cancelled and the rebate rates of 2268 export which would easily cause trade frictions were reduced from July 1 st, This severely influenced HS Company, which produces chemical products and mainly deals with international trade. During this period, the company leader considered stopping production to turn product, later it continued its production under the request of the local government. This led to serious losses for months, and its employees also become very anxious. The employees collided with ERP project, which was almost terminated for lack of fund. 3.2 Interior Management Factor Due to the short history of nation s SMEs, and the comparative low diathesis of the managers, the managing foundation of nation s SMEs is weak and nonstandard; all these factors will influence the implementation of ERP Integrity Of Basic Data and Standardization Of Business Process In nation s SMEs, most basic data is incomplete and business process is nonstandard. Except some financial data, the basic data of HS Company is also incomplete. For example, the salesman basically controls the customer s data; the company has never collected the customer s data except some limited customer's information from finance department. Stock data is inaccurate and incomplete, and data on account book differs from real data. The fixed assets registration is unclear, so does its ascription. Even the most basic personnel data is incomplete. The nonstandard business process seriously influences the company operation. For example, in stock procedure, invoices fails to arrive at the same time when raw or processed materials are arrived or use up, the finance department doesn t keep accounts. The implementation process of ERP needs more people and time, and the cost will be even bigger when it meets resistance Fluid Of Personnel And Capital The personnel and capital of nation s SMEs usually are flexible, this might be the advantage of nation s SMEs, however, nation s SMEs does not have a good management system, as a result, its human resource management is disordered and fixed assets registration is unclear. The status of HS Company is similar, although it has four subsidiary independent accounting companies, nine management departments, and four plants, its managers and workers are usually multitaskers, they may take charge of several jobs. The condition of fixed assets is similar; it might belong to this company, department or plant for one day, and belong to another one for others. The high mobility of personnel and capital brings great difficulty for the implementation of human resource management system and fixed assets system of ERP, which requests that the personnel shall have fixed posts and assets shall be assigned to certain unit. Certain mobility is allowable, however, there shall be strict corresponding management system, this is difficult for nation s SMEs to implement Family Management Mode In China many nation s SMEs are Family Corporation, the managers usually come from the same 168

4 family, and they are also the shareholder with absolute authority. For the few managers who do not come from the same family, they do not have enough power. This unhealthy culture seriously influences the implementation of ERP system. Such is the situation in HS Company, the second finance manager is an outsider, and has no power or method to control her subordinates, who are either family member or shareholder, finally she leaves the company. 3.3 Personnel Factor Lack of talents is another big obstacle for implementation of ERP in nation s SMEs. Personnel is crucial for ERP implementation, if some stuff at certain link are inadequate in thought or management or technique, they might lead to the failure of ERP project Top Manager Support The large corporation meets this kind of problem, so does SMEs. The ERP project shall substantially be a top manager project rather than formally. The top managers must participate in ERP project in person since the project is related to all management innovation of the enterprise. Due to the press of business, the top manager of HS Company hardly participate ERP project in person. Almost all the decisions are made by the project manager, which leads to some wrong decisions, and in the end delays the work period. But the top manage hold a meeting to solve all the problems when the project cannot continue, which keeps the project going Information Diathesis And Organization Ability Of Project Manager This factor is especially obvious in HS Company. The second project manager has poor information diathesis and his understanding to the ERP project is limited, therefore he makes some wrong decisions. What s worse, his organization ability is poor, and often brings some misunderstandings among colleagues. In the end, some new problems emerged when the old ones are not settled. The project also goes to a dead end. It is fortunate that a young man with five year s of sale experiences and bachelor degree replaces the second project manager after the general manager's effort, and becomes the third project manager. Through his organization and communication, the project turns to a favorable direction Middle Manager Support The ERP project not only needs the support from top managers, it also needs the support from middle managers, especially the managers in key departments, such as finance manager, stock and sell manager, warehouse manager and so on. The stock and sell managers of HS Company have ambiguous attitude for the implementation of ERP, which also influences their subordinates. They are not very cooperative when the project group members collect data from them, which postpones the work period Project Group s Work Ability Project group s work ability is important for the successful implementation of ERP. A project group with strong ability can solve various difficulties and promote the development of the project. Owing to the shortage of talents, HS Company employs four new workers that have just graduated from university to form the project group with some key users to implement ERP project. Since key users are busy, the core strength to implement ERP implementation in HS Company is the four new workers. Since they have just finished their studies, and does not have necessary social and business experiences, their work is very difficult. They are very frustrated in the process of investigating and collecting data, and often make mistakes during the inputting and setting procedures, many work have to start all over again. Since the company has employed these four new workers to implement ERP, the company employees feel that the implementation of ERP is not their job, and then the implement of ERP is independent from the company. Finally the ERP project runs to a dead end, the four new workers also feel frustrated, and leave the company one by one. This is one of main reasons that ERP implementation of HS Company is postponed. At present, key users begin to implement ERP by them, and it eventually fuses into the company Employees Understanding Of ERP It is important to understand ERP project correctly. Although the informationization consultation 169

5 organization carried out several trainings about ERP knowledge among employees of HS Company, it is ineffective. Its employees have little understanding of ERP little and are very suspicious about its effect. They will easily lose confidence when some difficulties appear, and will resist while the implementation involves some personnel benefits. Luckily the top manager has firm confidence and makes the company to continue ERP project. 3.4 Technique Support Factor Due to the shortage of information technical personnel, HS Company basically depends on the support from software supplier and informationization consultation organization to implement ERP Software Supplier Support The software supplier needs to provide excellent technique and methodology to support ERP implementation. In HS Company, there used to be a One-Card system to check work attendance before the ERP implement, the company requests to integrate this system with ERP system. The poor technique level of software supplier leads to longer implementation time and finally the ERP project is delayed Third Informationization Consultation Organization Support The existence of the third informationization consultation organization is beneficial to nation s SMEs. On one side, the consultation organization can help the company to establish an informationization program, to choose software type and to train its personnel; on the other side, it can help the company to supervise, to check and to accept the implementation. In HS Company, the third informationization consultation organization has certain function, but there are still some problems: firstly, the organization fails to investigate the project sufficiently, they fails to inquire the present management condition and personnel of HS Company deeply; secondly, the training is inefficient, the employee s understanding of ERP is not improved. 4 Conclusions Accordingly there four factors which are essential for the implementation of ERP in nation s SMEs, including exterior circumstance factor, interior management factor, personnel factor and technique support factor. Nation s SMEs share some of the factors with large enterprise during the implementation of ERP, and they also have some unique factors, such as influence of large clients or competitors, integrity of basic data and standardization of business process, mobility of personnel and capital, family management mode. Some factors, such as influence of government policy, software supplier support and third informationization consultation organization support, are more obvious in nation s SMEs than in large enterprises. Some factors, such as personnel factor, share equal importance both in nation s SMEs and in large enterprises. However, the ability and diathesis of personnel in nation s SMEs are below that of large enterprises. Restructuring internal management and raising employee understanding may solve the difficulty caused by some interior management factors and personnel factor. By choosing the correct software supplier and third informationization consultation organization, nation s SMEs can get better technique support. But the difficulties caused by exterior circumstance factors and some internal management or person s factors determined by essence of nation s SMEs are very difficult to improve, which requests the software supplier to develop more flexible software to suit exterior circumstance factors and essence of nation s SMEs. In addition, the software supplier and third informationization consultation organization shall try to develop more flexible methods and steps to guide the implementation of ERP in nation s SMEs. These might be the study direction for future theoretical researchers. References [1] F. Robert Jacobs, F.C. Ted Weston Jr.. Enterprise resource planning (ERP) A brief history. Journal of Operations Management, 2007, (25): 357~

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