Universiti Teknologi MARA. Differences in the Implementation of ERP System Between SMEs and Large Companies. Noorshahlina Sakyon

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1 n^^'f Universiti Teknologi MARA Differences in the Implementation of ERP System Between SMEs and Large Companies Noorshahlina Sakyon 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 NOORSHAHLINA BINTI SAKYON

3 ACKNOWLEDGEMENT I would like to gratefully acknowledge the contributions of several people who have helped me to complete this thesis. Firstly, I would like to convey my grateful thanks to my supervisor, Pn Rogayah Abdul Majid for her guidance and support until the end of the research. Secondly, thanks to my coordinator Puan Wan Nor amalina Binti Wan Hariri for her guidance on the report writing. Third, I would like to express my grateful thanks to all companies and people who involved in this research. Then, I would like to thanks to my family and my fi"iends for their encouragement and support. Last but first, I would like to thanks the One 'Allah", for giving me the strength, motivation and guidance to successfully complete this thesis. Ill

4 ABSTRACT Over the past few years, thousands of companies around the world have implemented enterprise resource planning (ERP) systems. ERP system is a packaged business software system that allows companies to automate and integrate the majority of their business, share common data and practices across entire enterprise and produce and access information in a real time environment. Nowadays, many ERP vendors have increased their focus on small medium enterprises or SMEs. The implementation of ERP system in SMEs may differ from large companies that have implemented it earlier. The objectives of this research are to identify the differences of ERP's implementation by SMEs and large company and to determine characteristics of the company that use ERP system. The methodologies used in this research are interview and review past research. The result indicates that there were differences in implementation of ERP system between SMEs and large companies in term of time, cost, the different systems adopted, the reengineering and customization of the system. The implementation strategies, benefit attained and reasons the companies implement ERP system were similar between SMEs and large companies. The companies that have implemented ERP system are large company, employ more than 1000 workers and their annual revenue between RMlOl million- RM4000 million. IV

5 TABLE OF CONTENTS CONTENTS DECLARATION ACKNOWLEDGEMENT ABSTRACT LIST OF TABLES LIST OF ABBREVIATIONS LIST OF FIGURES PAGE ii iii iv viii ix x CHAPTER ONE: INTRODUCTION Introduction Enterprise Resource Planning Small Medium Enterprise or SMEs Large Company ERP in Malaysia Implementation of ERP Differences in Implementation of ERP system Between SMEs and Large Companies Research Problem Scope Objective Significance of the Research CHAPTER TWO: LITERATURE REVIEW 2.0 History of ERP ERP in SMEs ERP in Large Company 15

6 2.3 Differences in Implementation of ERP system 16 Between SMEs and Large Companies 2.4 Issues in Implementation of ERP system ERP Benefits Constraints to Adopt ERP ERP Vendor Conclusion 27 CHAPTER THREE: METHODOLOGY 3.0 Define Objective and Problem Statement Construction Data Collection Data Analysis 32 CHAPTER FOUR: RESULT AND FINDINGS 4.0 Differences in Implementation of ERP system 34 Between SMEs and Large Companies 4.1 The characteristics of the company that use 42 ERP system 4.2 Limitation Conclusion 47 CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS 5.0 Conclusion Recommendations 50 REFERENCES 51 APPENDICES Appendix A 55 VI

7 Appendix B-Print Screen ERP System for Kanzen Tetsu 56 Sdn Bhd (PRONTO) vu

8 LIST OF TABLE Table Number Title Page Table 2.1 Top Ten ERP Benefits 22 Table 2.2 Constraints (Deloitte, 1999) 24 Table 3.1 Variables for differences in the implementation of ERP 30 system between SMEs and large companies Table 4.1 Differences of ERP's implementation between Proton Edar Sdn Bhd, Kanzen Tetsu Sdn Bhd,BCM Electronics Corporation Sdn Bhd and Alliance Contract Manufacturing Sdn Bhd (ACM) 34 Table 4.2 Summarization for the differences in implementation of ERP system between SMEs and large companies 41 Vlll

9 LIST OF ABBREVIATIONS ERP SMEs SMIDEC SMIAM PESB ICT IT IS Enterprise Resource Planning Small Medium Enterprises Small and Medium Industries Development Corporation SMI Association Malaysia Proton Edar Sdn Bhd Information and Communication Technology Information Technology Information System IX

10 LIST OF FIGURES Figure Number Title Page Figure 2.1 A framework for evaluating ERP acquisition 15 within SMEs Figure 3.1 Research Approach and Methodologies 28 for Differences in Implementation of ERP system Between SMEs and Large Companies Figure 4.1 The graph of the company size 42 Figure 4.2 The graph of the number of employees 43 Figure 4.3 The graph of the company's annual revenue 44 Figure 4.4 The graph of the company's sector 45 Figure 4.5 The graph of the company's market area 46

11 CHAPTER 1 INTRODUCTION This chapter is about the background and the rational of the study. It also gives the significant information of enterprise resource planning, the issues and problem that led to this research. 1.0 Introduction The world of business is changing rapidly due to the development of the new technologies. New technologies save money, time and make the business process becomes more efficient. The global business competition provides a constant threat to the business survival. It is a bonus for the experts to implement the new technology in order to gain competitive advantage in this world survival. Therefore, there are the difference between SMEs and large companies on how they implement the new technology. The main purpose of the business is to gain profit and to have a better place in the business. Therefore, there has been an increasing need to understand their business in a more integrated manner. This is because the benefits of the integration are too many which cannot be neglected especially while managing in the back-end processes. 1.1 Enterprise Resource Planning Enterprise Resource Planning or ERP system is a packaged business software system that allows companies to automate and integrate the majority of their business, share common data and practices across entire enterprise and produce and access information in a real time environment..erp software supports the business activities involved in back-office processes. ERP links information together that make it much easier for upper management to have more global picture of operations in almost real time. Enterprise Resource

12 Planning is in a group of Management Information System or MIS. There are many ERP packages for example Human Resource Management System (HUMS), Financial, Manufacturing, Distribution and Sales. The packages are different functionality for different industries. ERP system installed on a Database Management System for example DB2/400, DB2/MVS, DB2/Unix, Informix, MS SQL Server, Oracle, SQLBase and Sybase. The ERP team will setup ERP system and customized it according to the organization's process. After the installation is successful, the users only enter the data at one point and the information will distributed to the other modules. ERP systems include reporting tool for main reports and adhoc reporting. The benefits of ERP system are on-line or real time information throughout all the functional areas of an organization, data standardization across the enterprise, "bestpractices" included in the organization, the efficiency they force an organization to undertake and the analysis and reporting that can be used for long term planning. There are many ERP vendors but the top five ERP vendors are SAP AG, Oracle Corporation, Peoplesoft Inc., JD Edwards and Company and Baan International. All these five ERP vendors conquer 64 percent of total ERP market. The advantages of ERP were integrated functionality, consistent user interface, integrated database and unified architecture and provide tools for adhoc inquiries. The disadvantages of ERP system are difficulties in change the way of business process, the cost of the implementation and cost to train the user are very expensive and the implementation process can takes a long time. It takes time to realize the benefits of an ERP system, approximately eight months after implementation. The full commitment from the top management of the organization, the users and software vendor are very important to make sure the successfully of the ERP implementation.

13 1.2 Small Medium Enterprises or SMEs Generally Small and Medium Industries Development Corporation (SMIDEC) defined SMEs into two broad categories: i. Manufacturing, Manufacturing-Related Services and Agro-based industries Small and medium enterprises in the manufacturing, manufacturing related services and agro-based industries are enterprises with full-time employees not exceeding 150 or with annual sales turnover not exceeding RM25million. The detailed definitions of SMEs by size for this category are microenterprise the sales turnover of less than RM250,000 or full time employees less than 5, small enterprise the sales turnover between RM250,000 and less than RMIO million or full time employees between 5 and 50 and finally medium enterprise the sales turnover between RMlOmillion and RM25 million or full time employees between 51 and 150. ii. Services, Primary Agriculture and Information & Communication Technology (ICT) Small and medium enterprises in the services, primary agriculture and Information &. Communication Technology (ICT) sectors are enterprises with full-time employees not exceeding 50 or with annual sales turnover not exceeding RM5 million. The detailed definitions of SMEs by size for this category are for micro-enterprise the sales turnover of less than RM20,000 or full time employees less than 5, small enterprise the sales turnover between RM200,000 and less than RMl million or full time employees between 5 and 19 and finally for medium enterprise the sales turnover between RMl million and RM5 million or full time employees

14 between 20 and 50. The areas covered under the manufacturing related services are research and development (R&D), product and process design, distribution and logistics, marketing, environmental management and other related services. Small and Medium Industries Development Corporation (SMIDEC) is an agency under the Ministry of International Trade and Industry (MITI). The functions of SMIDEC are to promote and coordinate the development of SMEs in Malaysia through specific programs, to provide technical support and management counseling services with the co-operation of other agencies involved in the enhancement of small and medium industries through specific programs, to forge industrial linkages between SMEs and large companies or MNCs, to supervise, manage and coordinatefinancialassistance to SMEs and to collaborate with other agencies, locally and internationally, in the interest of developing SMEs. Small and Medium Enterprises (SMEs) in Malaysia are important because it is involved about 90 per cent of the manufacturing establishments. The importance of SMEs is even more significant as Malaysia moves towards realizing the objective of becoming a fully industrialized nation by In Malaysia the government has Small and Medium Industries Development Plan (SMIDP) to contribute to the creation of a strong, resilient and competitive SMEs that will strengthen inter and intra industry linkages, thereby increasing local participation in the manufacturing value chain. The SMIDP provides the development focus for each of the industry clusters and action plan to operationally the strategies and achieve the targets set. In order to be competitive, SMEs should adopt measures to reduce cost, improve quality and increased productivity by implement enterprise resource planning or other IT application in their company.

15 1.3 Large Company The definition for large company is companies with full time employees exceeding 150 or with annual sales turnover exceeding RM25 million. The examples of large companies in Malaysia are Telekom Malaysia (TM), Petronas Dagangan Berhad, Maxis Communication and Proton Edar. 1.4 ERP in Malaysia The trends in the Malaysian ERP market were adapted the organization, not the ERP system and fewer competitors. Many companies were discovering that customization were complex, time consuming, expensive and make the system impossible to upgrade. The number of companies competing in Malaysian enterprise software market approaches 100, where it is the total number of Malaysian and foreign software firms. The other trend in the Malaysian ERP was service-oriented architectures, where the emergence of Web services supports the dynamic, platform independent integration of applications, enabling business processes to be carried out flexibility and automatically via the Internet. ERP systems are now linking with web and E- commerce applications, business-to-business, and business-to-consumer. Application that was broken down into small modules that can be generated located and made available dynamically on the Internet as services. All these modular services can be displayed on any platform using XML standards and transported using standards protocol such as SOAP, HTTP and TCP/IP to promote true interoperability. In this digital economy, many SMEs implement ERP in their organization to be more competitive. To make more SMEs use ERP technology, SMI Association Malaysia (Smiam) and Dignersys Consulting Sdn Bhd offer two ERP solutions for SMEs at RM88,000 and RMl88,000. Small and Medium Industries Development Corporation (SMIDEC) has a

16 financial assistance programs for SMEs in Malaysia. The programs are divided into two which are Grant and Soft Loan and there are more subprograms under these two main programs. For the ICT adoption to improve competitiveness, efficiency and productivity of SMEs, In Grant programs there is a programs or scheme named ICT Application (E-Manufacturing and E-Commerce). In this ICT Application provide assistance for SMEs to purchase of Enterprise Resource Planning (ERP) software, implementation charges including system study, customization and training, purchase of related networking equipment and server and purchase of other software such as CIM, ERM, MRP, SCM and CRM. The form of assistance is Grant not exceeding RM500,000 per company or 50% of approved project costs, whichever is lower. Besides, for the Soft Loan programs or scheme there is Soft Loan Scheme for ICT Adoption, which gives a loan to SMEs to purchase of ERP software or first year subscription to on-line ERP system or other similar software (CIM, ERM, MRP, SCM, CRM), implementation cost including system study, customization, training and purchase of server and related networking equipment. The maximum loan is RM250,000 and the minimum is RM20,000. The interest rate is 3.0% per annum and repayment period is five years. 1.5 Implementation of ERP ERP implementation is a very difficult and long task. A simple ERP project takes on average months to complete and larger ERP projects may take many years to complete. Before the ERP implementation begins the company must ensure alignment of the project to the company's business plan, ensure ERP goals are clearly and widely understood, develop a well established communication plan that involves the entire organization and

17 obtain executive sponsorship. All of these can increase the chances of a successful ERP system implementation. ERP implementation influenced by four major criteria, functional complexity, size or type of user population, geographical spread and package modifications. Complexity of the ERP functionality increased with the size of ERP deployed and with the degree of supply chain automation. For the size of user population, complexity increases proportionately with heads-down user rather than with total users Single-site deployments are the simplest, while multiple sites across multiple continents are the most complex. Many companies make the mistake of trying to over customize the application framework to fit their existing business process model. During the package selection process, it is important to gauge the fit of the ERP system with the existing business model. Minimizing customization and modifications will result in a faster, more successful, deployment. The biggest issue in ERP is the failure or successful implementation. Historically research shows that most of the ERP implementation starts failed. The most common problem in the implementing ERP are extending the implementation schedule and running over budget. These are the characteristics of successful ERP implementation, executive endorsement and staff support for study and change, willingness to modify business practices, management not only measures byfinancialbut also by metrics such a timely reporting. The human factors also lead to successful ERP implementation such as staff accountability, organizational responsiveness and smooth communications, solid training and adequate preparation, avoidance of heavy modifications that impede upgrades and lastly are staff accountability for successful implementation based on carefully defined performance measurements.

18 From the previous research showed that there are many reasons why companies fail in implementing ERP. The first reason is lack of top management commitment. Usually, the top management delegates the ERP implementation to lower management and they often do not concern with critical event. The successful implementation required the proper commitment of time and resources. The second reason is inadequate requirements definition where the developing of functional requirements definition is not comprehensively and systematically. The third is poor package selection. It occurs when a company inadequately developed functional requirement definition. The fourth is inadequate resources where many companies attempt to save money by doing everything on an overtime basis. For example an individual assign to ERP projects need to do other works simultaneously. The fifth is lack of a change management approach where it is often caused by failure to build a case for change, inadequate communication and lack of top management support and commitment. The next reasons for the failure of implementing ERP are miscalculation of time and effort, misfit of application softavare with the business process and companies makes unrealistic expectations of benefit and return on investment. Another of the biggest causes of ERP implementation is inadequate training and education, which are usually underestimated. In addition, poor project design management in the project plan and poor communication between staff also caused the ERP implementation fail. The last reason why the companies get fail in implementing ERP system is companies try to avoid temporary cost with takes a risky action by doing multi-site simultaneously and subjecting all plant to a total shutdown. Some companies attempt unrealistically compresses the schedule in order to save expenses. In conclusion, to make sure a

19 successful ERP implementation companies should learn from the mistakes of others and try to avoid all that mistakes. 1.6 Differences in Implementation of ERP system between SMEs and Large companies The term differences for this research are what make the implementation of ERP system by SMEs and large companies are different. The differences are included time, cost, the different systems adopted, the implementation strategies, the degree of reengineering and customization of the system and benefit attained and reasons why the organization implement ERP system. 1.7 Research Problem ERP is still new for SMEs in Malaysia and not many SMEs have implemented ERP system because of its cost. The implementation costs for ERP system are very expensive and normally only large companies implement this system. If SMEs had implemented ERP system, maybe there is a difference with large system because the business processes between these two types companies are different. This research describes the differences of the ERP's implementation between SME and Large companies focusing on the process of the ERP system in their organization, on time of implementation, cost and budget, implementation strategy, ERP system module the organization used, why the companies implement ERP system and what the benefit the companies obtained. Moreover, to determine the characteristic of the SMEs and large company that are had implemented ERP system. The characteristics that are chose are size of the company, number of employees, company's sales turnover, number of employees and the company's market area.

20 1.8 Scope The scope of the study is the SME and Large companies based in Peninsular Malaysia. This research focuses on the approach in the implementation of ERP system by SMEs and large organization. 1.9 Objective i. To identify the differences of ERP's implementation by SMEs and Large companies, ii. To determine characteristics of the company that use ERP system Significance of the research The significance of the research is to make company, SMEs and Large organization success in implementing ERP system. From the historical information it is known that improper of Enterprise Resource Planning (ERP) software projects can cause considerable problem for companies. The time and cost of the implementation, the different systems adopted, the implementation strategies, the degree of reengineering and customization of the system, the outcome and benefit attained may different across sized of the company. This research will give benefit to SMEs because they can know and learn how the large companies do implementation process ERP system in the company. It is because large organization has implemented ERP system earlier than SMEs. In addition, nowadays it has proved that SMEs strongly contribute to national economies and want to improve their performance by adopting information technology. 10

21 CHAPTER 2 LITERATURE REVIEW This chapter is about the review from the past articles related to the research topic which is about enterprise resource planning and issues on the implementation of this system. There are many researches about enterprise resource planning or ERP system but only a few are done by Malaysians. Many of these researches are based on the European and American company. It is because maybe only now Malaysia's companies know the benefits of ERP systems and they are planning to implement it. There are many research issues in implementing enterprise resource planning such as managing the implementation process (Mabert, et. al; 2003), the implementation of ERP packages in different organizational and national cultures (Krumbolz & Maiden; 2001) and the experiences of water corporation in implementing ERP system (Mandal & Gunasekaran; 2003). 2.0 History of ERP The ERP or Enterprise Resource Planning market grew rapidly in the late 1990's because of the client/server environment became a popular enterprise computing platform for many company and ERP systems represents a software solution for companies migrating from a mainframe environment to a client/server environment. Enterprise Resource Planning (ERP) system is an outgrowth of Material Resource Planning (MRP) initiated in the 1970's MRP evolved to MRP II then to Business Requirements Planning (BRP) and finally to ERP. Material Requirements Planning (MRP) is a computerized inventory control and production planning system for generating purchase orders and work orders of 11

22 materials, components, and sub assemblies. MRP began as an analysis of manufacturing processes and production schedules, combined with bills of material or resources, to predict what the requirements would be for various components or manufacturing processes in order to meet the current master schedule. The major components in MRP system are bills of material, master schedule and inventory record. Manufacturing Resource Planning (MRP II) is an expansion of MRP. MRP II helps to plan all the resources necessary for manufacturing including financial analysis, feedback loops and marketing plans. The differences between MRP, MRP II and ERP concept are MRP only covered material planning and now it is only part of ERP. MRP II is the growth of MRP and covers all the resources in the manufacturing company with the ability to manage hypothetical situations. The interacting functions in this model are Commercial Planning, Sales, Master Production Scheduling, Materials Resource Planning (MRP) and support systems for Capacity and Materials Execution. ERP systems are the latest stage of this evolution and the component in this system are sales and marketing, master scheduling, material requirement planning, capacity requirement planning, bill of material, purchasing, accounts payable and receivable, logistics, asset management and financial accounting. The major differences between MRP II and ERP system are ERP use of a graphical user interactive or GUI, use client/server architecture, relational database, open-systems portability and much more integrated than MRP II. MRP II is a management concept while ERP is its technical subset. The purpose of MRP II is reducing the company cost, increasing productivity and customer service. While, ERP's benefit only can be gain if the entire reengineering process followed. 2.1 ERP in SMEs Today ERP systems not only implemented in many large governments, but also a critical role in discussions regarding the future of business as we know 12

23 it. SMEs also had implemented ERP system in their companies to compete with large company. Gartner Group (1999) forecast the ERP market reach to USD 20 billion by 2002, divided evenly between revenue in services and licensing. Many researchers have done researched about the implementation of ERP in small medium enterprises (Bemroider & Koch, 2000; Tagliavini, Faverio, Ravarini & Buonanno; Bemroider & Tang, 2003; Mabert et al., 2003; Sarkis & Sundarraj, 2003; Carton & Adam, 2003; Liang & Xue, 2005; Laukkanen, Sarpola & Hallikainen, 2005).Therefore, it makes ERP vendor to offer a cheaper and less complexity ERP solutions to SMEs (Everdingen, Hillegersberg & Waarts, 2000). Most ERP system vendors have increased their focus on or medium sized company. There are some reasons for this trend including a saturation of the market as most large company have already implemented an ERP solution, increasing possibilities and need for the integration of systems between company and the availability of relatively inexpensive hardware (Gable & Stewart, 1999). Research done by Tagliavini et al. showed that SMEs used ERP systems mostly for contingency and exogenous reasons rather than as a result of their accurate analyses of their needs and opportunities. There were three strategies for achieving fit between ERP systems and adopting company. First, ERP system need to be localized to reflect the local management features, second is ERP should be customizable at a variety of levels. Finally, business process reengineering (BPR) should carried out in incremental manner and taking the culture of the company into account (Liang & Xue, 2005). 13

24 Ravarini, Tagliavini, Pigni & Scuito suggest a framework for evaluating ERP acquisition within SMEs refer to the level of business complexity and the extent of organizational change the company plans to achieve (Figure 2.1). The framework allows the company managers to assess the suitability of an ERP system according to the company aims and needs to redesign the business process. Position 1: The business complexity is high and does not want to redesign the business process; the company can apply simplified approach. Position 2: The business complexity is high and ready to redesign its organization, the company can apply traditional approach but this approach need higher investment and company impacts. Position 3: The low business complexity and resistance to organizational impact. The companies need to focus on its existing applications by verifying the effectiveness of their support to the company strategic objectives. Position 4: the low business complexity and want to redesign their organizational structure. Therefore, the companies need to start redesigning the business process and verifying the coverage level of existing software applications with the new processes. Below is the framework for evaluating ERP acquisition within SMEs. 14