CHAPTER 1 STUDY OF PERFORMANCE OF ERP SYSTEM IN SELECT INDIAN MANUFACTURING FIRMS: INTRODUCTION

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1 CHAPTER 1 STUDY OF PERFORMANCE OF ERP SYSTEM IN SELECT INDIAN MANUFACTURING FIRMS: INTRODUCTION 1.1 Introduction Today s global business environment has brought in new competitions with new opportunities and new challenges. This has resulted in decreasing product life cycles and reducing profit margins. To anticipate and respond quickly to the changing business conditions, the organization need solid information system that supports all aspects of business with power and flexibility. Business houses always find great difficulty in quickly making out the required information because of the voluminous data, improper segregation, departmental arrangements and unprecedented delays. Organizations were constantly searching for some means or mode to overcome this debacle. The inconvenience was not only pinching on monetary profits but also antagonized customers who were made to wait for a long time for a small piece of data. They needed a system based on a common database and a modular software design. The common database can allow every department of a business to store and retrieve information in real-time. The information should be reliable, accessible, and easily shared. The modular software design should mean a business can select the modules they need, mix and match modules from different vendors and add new modules of their own to improve business performance. Enterprise Resource Planning or ERP as it is shortly referred has come to overcome this menace. It is a boon to organizations that were in need of this kind of facility for ever 1. Though, there is a time lag in the adoption of ERP systems among firms in the developed and developing markets, ERP system implementations in these markets show remarkably similar trends. In both these markets, early ERP system deployments comprised mostly of module and sub-module implementation of module categories such as financials, logistics, and human resources that streamlined and integrated key functional areas. Once 1

2 these early ERP system implementations stabilized, firms in these markets then turned their attention to expanding their implementation scope by adding more value chain activities through deployment of modules such as supply chain management (SCM) and customer relationship management (CRM) 2. Global ERP market has registered tremendous growth in the past decade. The market witnessed a double digit growth rate in the past few years. Mabert et al. 3 (2003b) indicate that over 30,000 firms worldwide have implemented ERP systems and the vast majority of these deployments have taken place in the period between mid 1990s and Research firm Gartner recently released a report saying companies will spend 14.9 per cent more on enterprise social software in the year 2010 than in 2009, with the total reaching $664.4 million (about Rs Cr.). According to the report in the year 2011, that figure will jump 15.7 per cent to $769.2 million (about Rs.3461 Cr.) 4. The ERP Market Sizing Report, , presented by AMR Research states that the ERP market had a spectacular year, with total revenue growing by 14 per cent and license revenue up by 18 per cent from Also the sale of traditional applications was very healthy in Many ERP vendors saw substantial revenue growth from acquisition of other software companies. The ERP application revenue estimates from 2006 to 2011, as per the report are as follows: for the year 2006 the estimated revenue was 28.8 Billion US $ which was expected to rise to 32.3 Billion US $ in 2007, 35.8 Billion US $ in 2008, 39.4 Billion US $ in 2009, 43.4 Billion US $ in 2010 and for the year 2011 the estimated revenue was 47.7 Billion US $. Globalization, centralization and regulatory compliance are the key drivers for the growing ERP investments among large corporations. These companies buy ERP system in response to their requirements and desire to participate in global markets. 2

3 1.1.1 Overview of ERP Enterprise Resource Planning (ERP) is a firm wide information system that re-engineers and integrates key business processes like Manufacturing, Logistics, Supply Chain Management, Financials, Accounting, Projects, Human Resources and Customer Relationship Management etc. to improve its efficiency, agility, and profitability. ERP is thus a cross-functional enterprise system that enables free flow of information from different functional units of the firm helping in achieving a dynamic business environment 6. An organization has to do meticulous planning, devise strategies before going ahead with ERP. ERP can cut down costs; improve the quality of working time, and thus helps in making the maximum use of technological advancements. For instance the executive in the Sales Department will be able to respond to a customer query immediately by making out the status of the product's delivery which would not have otherwise been possible but for the intervention of ERP in the organization. ERP has enabled organizations to do away with laborious and time consuming process Performance Measurement of ERP System in Manufacturing Firms It is difficult to calculate the Return on Investment (ROI) for ERP decisions, though several successful installations of ERP had dramatic returns on investment. It must be realized that ERP is only an enabler. ERP gives agility to organization which can be exploited to improve profitability, market share or customer service. Without ERP, the organization may not be in a position to handle a larger business or provide faster response to customers. The result from enlarged business or faster customer response should pay back for the ERP investment. It is predicted on the fact that the organization would leverage the agility towards such corporate goals. ERP helps in pursuing such goals often successfully. But mere ERP implementation does not necessarily translate the benefits. Better health enables a human being to do things which would have been difficult, if not impossible without such sound health. But if the individual does not make use of his/her improved status towards the pursuits of any goal he/ she are not 3

4 capitalizing on the improved health. ERP must also be viewed as a way of providing better health to an organization 8. The benefits from ERP come in three different forms i.e. in the short term, medium term and long term. When initially implemented in a year of organization going live with ERP, it helps in streamlining the operational areas such as purchase, production, inventory control, finance and accounts, maintenance, quality control, sale and distribution etc. This benefit is the form of automating the transactions which promises accuracy, reliability, availability and consistency of data. The next level of benefits accrues in the medium term after the data in the above area are in place. At this stage, the organization not only gets data but can use it for more meaningful analysis and plan for major resources (material, machine capacity, manpower, and money). At this stage, the organization realizes benefits in terms of reduced working capital (inventory and receivables), better financial forecasts, reduced cycle time for order fulfillment, improved co-ordination between various related processes in the organization etc 9. The real benefits of ERP comes in the long-term when the organization is in a position to apply the experience of the best business process involved over years of implementing the ERP for other organizations. At this stage the organization adopts the best business practices such as Total Quality Management (TQM), Just-In-Time (JIT) and Computer - Integrated Manufacturing (CIM). In the long-term ERP also enhances the organization s competitive edge by providing it the ability to change easily. An ERP package provides various ways of performing a business activity, and an organization can adopt a different way of performing the same activity by re-configuring the ERP and testing the changes 10. Al-Mashari et al. 11 (2003) classifies changes in performance measures due to ERP system implementations into five categories. The operational category concerns improvements in functional areas leading to cost reductions, cycle time reductions, and productivity improvements. Benefits such as better resource management, improved decision-making, planning, and performance improvements fall into the managerial group. Strategic benefits help firms to innovate, build cost leadership, generate product differentiation, 4

5 and build external links in the supply chain. The firm s IT infrastructure benefits through IT cost reductions and increased IT capacity. Organizational benefits such as business learning and successful organizational changes also accrue to firms General Model of ERP System Performance Galbraith 13 (2002) and Madapusi 14 (2008) made empirical study of Post Implementation Evaluation of Enterprise Resource Planning (ERP) Systems based on conceptual model that evaluated the varying performance benefits flowing from different ERP system implementations as well as investigating the impact of critical success factors (CSFs) on the ERP system deployment process. ERP systems comprise of a number of modules. The systemic concept that underlies ERP systems suggests that increasing changes in performance accrue to firms as they implement more and more modules of the ERP system. Firms enhance their performance benefits by fine-tuning their ERP systems through effective integration of modules over a number of years. Studies further show that CSFs play a crucial role in facilitating ERP system deployments 15. A general model of ERP system performance is given in the following figure. Figure 1.1 General Model of ERP System Performance ERP System Implementation Status Change in Performance Critical Success Factors Source: Madapusi (2008); Post-Implementation Evaluation of Enterprise Resource Planning (ERP) Systems 2008, Published Doctoral Thesis 5

6 The model in the figure 1.1 relates the ERP system implementation status to changes in performance with the moderation of this relationship by CSFs. The theoretical underpinnings of this model are based on the use of Galbraith s information processing theory 16. Madapusi (2008) identified 14 ERP modules, 14 CSFs and 10 areas of performance on the basis of literature review. His study is based on 14 modules comprising the ERP system, affecting 10 measures of change with moderating effect of 14 critical success factors. 1.2 Brief outline of Review of Literature Over the past decade and a half, ERP has come to mean many things Information Systems (IS), Enterprise Resource Management (ERM), and Enterprise Systems (ES) to-many people academicians, practitioners, and vendors. The ambiguity surrounding the term ERP allowed the confusing proliferation of research in alternate fields of study 17. There are two broad streams of research that has emerged over the years ERP as IT system and ERP as a management system. The ERP as an IT system research stream focuses on implementation and maintenance issues. The challenges involved in getting the system up and running dominate this research area. The ERP as a management system research stream focuses on operational and usage issues. Recently, the strategic use of the ERP system and its impact on business performance also has become research area 18. The well publicized failures and delays associated with ERP deployments has directed most research efforts at systems issues such as configuration, design/redesign of business processes, maintenance, customization, and upgrades (in ERP as IT system). The bulk of research in this area is dominated by descriptive and case studies, with empirical and modeling studies gaining prominence in the past few years only. There is a paucity of research in the managerial use of ERP systems to improve business performance 19. 6

7 Relevant Research Studies Few researchers have discussed the impact and success of such systems (ERP) for adopting firms especially at post implementation stage. (E.g. Sedara et al. 2002, Gable et al. 2003, Sedara et al. 2004, Madapusi 2008 etc) 1.3 Need For Research Research Problem ERP system has become inevitable for organizations and its effective utilization is of utmost importance. There are very few studies (e.g. Sedara et al. 2002, Gable et al. 2003, Sedara et al. 2004, Madapusi 2008) which evaluate the varying performance benefits flowing from different ERP system implementations as well as investigating the impact of CSFs on the ERP system deployment process. Therefore need for research in the Indian context was felt in this area. Accordingly the present study is embodied as Study of Performance of Enterprise Resource Planning (ERP) System in Select Indian Manufacturing Firms Research Objectives Prior research on ERP system performance by Madapusi (2008) addressed following research questions for Indian firms: (1) What are the modules that comprise an ERP system? (2) What are the CSFs that impact ERP system implementations? (3) What are the changes in performance that result from ERP system implementations? (4) Does a relationship exist between the implementation status of the ERP system and changes in performance? (5) Does a holistic ERP system provide changes in performance? (6) Do CSFs influence the relationship between the implementation status of the ERP system and changes in performance? This study addresses the same questions for recent period. 7

8 1.3.3 Outline of Research Work Carried To seek answers to the above referred research questions the research work is divided into two phases. In the first phase of the research study detailed review of literature of ERP system has been carried out. It helped to identify the research gap for the study. Once this has been done the available ERP studies has been evaluated to identify ERP modules, critical success factors (CSFs) and change in performance to use in next phase of empirical study. In summary, the following three questions are addressed in the first phase of the research: 1. What are the modules that comprise an ERP system? 2. What are the CSFs that impact ERP system implementations? 3. What are the changes in performance that result from ERP system implementations? The second phase of the study consists of empirical study of ERP system performance in Select Indian manufacturing firms. The data were collected through structured questionnaire which was analysed and results are presented to test the hypotheses. The following research questions are addressed in the second phase of the research: 4. Does a relationship exist between the implementation status of the ERP system and changes in performance? 5. Does a holistic ERP system provide changes in performance? 6. Do CSFs influence the relationship between the implementation status of the ERP system and changes in performance? 1.4 Chapter Scheme The study is presented as per following chapter scheme: CHAPTER 1 Study of Performance of ERP system in Select Indian Manufacturing Firms: Introduction - This chapter gives an overall view of the purpose of the study. It tries to find the research gap stating the need of research. It further defines the research problem, derives research questions, and provides a foundation for the study. Chapter scheme designed for the study is presented. 8

9 CHAPTER 2 CHAPTER 3 CHAPTER 4 Overview of Enterprise Resource Planning (ERP) System: This chapter describes the need, evolution, meaning, definition, characteristics and benefits of ERP systems. It gives an overview of ERP system identifying the modules of ERP system, lists the measures of performance of ERP system implementation and states the importance of critical success factors. It further describes the phases of ERP system implementation. In the last part of the chapter evaluation of the ERP system performance is done, based on which the general model of ERP system performance is adopted. Study of Performance of ERP system in Select Indian Manufacturing Firms: Review of Literature - This chapter reviews literature pertinent to the identified research issues in this study. A synthesis of descriptive studies, case studies and survey studies identifies the modules that comprise the ERP system, the critical success factors (CSFs) associated with ERP system implementations, and measures of change in performance resulting from ERP system deployments. The findings from the review of literature are linked to the present study for conceptualizing the ERP system performance model which is traced by literature. Based on this, framing of the hypotheses is done in the last section of the chapter. Study of Performance of ERP system in Select Indian Manufacturing Firms: Research Methodology - This chapter reports the research problem, research objectives and methodology adopted in the present research study. It discusses the hypotheses framed for searching answers for the various research problems. Limitations of the study are mentioned in the last section of the chapter. 9

10 CHAPTER 5 CHAPTER 6 Study of Performance of ERP system in Select Indian Manufacturing Firms: Findings - This chapter discusses the demographic profile of the sample units. It further explains the frequency analysis of the modules that form the ERP system, the CSFs that moderate the performance of the ERP system and the measures of change in performance. The chapter further discusses the results of factor analysis, multiple regression analyses and univariate ANOVA applied for testing postulated hypotheses and searching answers for the relevant research questions. Study of Performance of ERP system in Select Indian Manufacturing Firms: Discussion, Analysis and Suggestions for further study - This chapter provides an overall summary of the findings of the study. It discussed and analyses the findings of the study. Further the implications and contribution of the study are discussed. The chapter also makes some suggestions for future study and discusses the limitations of this research study. 1.5 Chapter Concluding Notes This chapter explained the context of study of ERP system performance, research problem and objectives and outline of the thesis. The next chapter gives overview of ERP theory in the backdrop to help develop theoretical framework of the present study. 10

11 END NOTES 1 2 Madapusi (2008); Post-Implementation Evaluation of Enterprise Resource Planning (ERP) Systems 2008 Published Doctoral Thesis 3 Mabert, V.A., Soni, A., & Venkatramanan, M.A. (2003b). The Impact of Organization size in Enterprise Resource Planning (ERP) Implementations in the US Manufacturing Sector, Omega, 31(3), ERP Market Sizing Report , by AMR Research. Available on Downloaded on ERPwire.com ERP Fundamentals Available online at: articles/erp-fundamentals.html ERPwire.com ERP Fundamentals Available online at: articles/erp-fundamentals.html 7 Ibid 8 S. Sadagopan ERP : A Managerial Perspective 1 st Edn Tata McGraw-Hill Publishing Company Limited, New Delhi. 9 Rajani R L Going the ERP way: Important Issues, in S. Sadagopan (ed.) ERP : A Managerial Perspective 1 st Edn Tata McGraw-Hill Publishing Company Limited, New Delhi. 10 Ibid 11 Al-Mashari, M., Al-Mudimigh, A., & Zairi, M. (2003). Enterprise Resource Planning: A Taxonomy of Critical Factors. European Journal of Operational Research, 146(2), pp Madapusi (2008), op. cit., Pg Galbraith, J.R. (2000). Designing the Global Corporation. Jossey-Bass Inc.: San Francisco 14 Madapusi (2008); op. cit. 15 Ibid 16 Ibid 17 Rajani, op cit. 18 Madapusi (2008);op cit. 19 Ibid 11