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2010

Enterprise Resource Planning: Is It Necessary?

OPR 703 – Operations Management

Is It Necessary? OPR 703 – Operations Management Prepared by: Benny Roy Parluhutan Napitupulu (MMR

Prepared by:

Benny Roy Parluhutan Napitupulu (MMR 151091024)

Is It Necessary? OPR 703 – Operations Management Prepared by: Benny Roy Parluhutan Napitupulu (MMR 151091024)
It Necessary? OPR 703 – Operations Management Prepared by: Benny Roy Parluhutan Napitupulu (MMR 151091024)
1. Introduction Business organizations are complex systems in which various functions, such as purchasing, production,
1. Introduction Business organizations are complex systems in which various functions, such as purchasing, production,

1. Introduction

Business organizations are complex systems in which various functions, such as purchasing, production, distribution, sales, human resource, finance, and accounting must work together to achieve the goals of the organization. However, in the functional structure used by many business organizations, information flows freely within each function, but not so between functions. That makes information sharing among functional areas burdensome.

Information systems such as Manufacturing Resource Planning (MRP II) and Enterprise Resource Planning (ERP) have been used to provide support for achieving an integrated and standardized record keeping that will permit information sharing among different areas of an organization, in order to manage the system more effectively.

Firms around the world have been implementing ERP systems since the 1990s to have a uniform information system in their respective organizations and to re-engineer their business process. 1 ERP system as a packaged software has some advantages, although it also has its own disadvantages. An attempt has been made in this paper to analyze the cost and benefit of implementing ERP, including a case study of a company that implement ERP system, and finally came up with a conclusion and recommendation whether ERP is necessary or not.

2. What is Enterprise Resource Planning?

In the 1990s innovations in information technology led to the development of a range of software applications aimed at integrating the flow of information throughout a company, and these commercial software packages were known as Enterprise Systems. During this period one particular enterprise system called ERP caught the attention of some of the world’s largest companies. It has been estimated that businesses around the world have been spending almost $10 billion per year on ERP systems. 2

1 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.111.7702&rep=rep1&type=pdf

2 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.111.7702&rep=rep1&type=pdf

Enterprise Resource Planning: Is It Necessary? Page 1
Enterprise Resource Planning: Is It Necessary? Page 1
Various definitions and descriptions of ERP systems can be found in many literatures. A recent
Various definitions and descriptions of ERP systems can be found in many literatures. A recent

Various definitions and descriptions of ERP systems can be found in many literatures. A recent and comprehensive definition of ERP system is provided by Behesti (2006), who defined ERP system as “a set of business applications or modules, which links various business units of an organization, such as financial, accounting, manufacturing, and human resources into a tightly integrated single system with a common platform for flow or information across the entire business”. 3 Basically, it is a packaged software system that enables a company to manage the efficient and effective use of resources (inventory, materials, human resources, sales, marketing, finance, customer information, etc) by providing a total, integrated solution for its information processing needs.

Building a single software program that serves the needs of people in finance, as well as it does the people in marketing and in the warehouse is a big issue. Each of those departments typically has its own computer system, which is optimized for the particular ways that the department does its work only. But, ERP combines them all together into a single, integrated software program that runs off a single database, so that the various departments can share information and communicate with each other more easily.

3. Evaluation on ERP Systems Implementation

3.1. The Advantages of ERP Systems

The appeal of the ERP system is clear. While most organizations typically had software systems that performed much of the component functions of ERP, the standardized and integrated ERP system provide a degree of interoperability that was difficult and expensive to achieve with standalone, custom-built systems.

For example, when a salesperson enters an order in the field, the transaction can immediately flow through other functional areas both within and external to the firm. The order might trigger an immediate change in production plans, inventory stock levels or employees’ schedules, or lead to the automated generation of invoices and credit evaluation for the customer and purchase order from suppliers. In addition to that, the ability of ERP systems to disseminate timely and

3 http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1003&context=pacis2009

/viewcontent.cgi?article =1003&context=pacis2009 Enterprise Resource Planning: Is It Necessary? Page 2
/viewcontent.cgi?article =1003&context=pacis2009 Enterprise Resource Planning: Is It Necessary? Page 2
accurate information also enables improved managerial and worker decision making. Managers will be able to
accurate information also enables improved managerial and worker decision making. Managers will be able to

accurate information also enables improved managerial and worker decision making. Managers will be able to make decisions based on real-time data. 4

Human resources functions can also be improved through ERP by removing redundancy and tediousness of daily activities. This allows more time to be spent on value-added activities, which in turn leads to more fulfilling jobs for employers. As employees become more empowered, they become more involved in decision making process. With the right training and guidance, they can make decisions on their own with minimum supervision, which allows their supervisors to spend more time on value-added activities.

However, all of the benefits that have been mentioned above will not be fully achieved until the system is already in stable condition for a certain period of time, usually for at least a year. Once the system is already stable and users has already get used to the new system, all of the benefits of implementing ERP will be experienced.

3.2. The Disadvantages of ERP Systems

In spite of the advantages, ERP system implementation has also its own disadvantages. Perhaps one of the biggest disadvantages of ERP system implementation is the cost. Implementation of ERP system requires a substantial investment of time, money, and internal resources. It is also fraught with technical and business risk. A typical ERP installation has a total cost of about $15 million, such as training, integration, testing, conversion, and consulting. 5 The cost of ERP system implementation can be as high as 2% to 3% of revenues. At this point, only large firms that can truly take advantage of the benefits that are offered by ERP system. A number of studies have shown that the biggest challenges companies will face when trying to implement ERP deals with investment. 6

In addition to that, one of the biggest problems with ERP is that it is hard to customize. There are very few companies that can effectively use ERP right out of the box. It must be modified to suit their needs, and this process can be both expensive and tedious. In many cases, the business

4 http://opim.wharton.upenn.edu/~lhitt/files/erp.pdf

5 http://www.cluteinstituteonlinejournals.com/PDFs/2006475.pdf

6 http://www.exforsys.com/tutorials/erp/theadvantagesand disadvantagesof erp.html

‐ advantages ‐ and ‐ disadvantages ‐ of ‐ erp.html Enterprise Resource Planning: Is It Necessary?
‐ advantages ‐ and ‐ disadvantages ‐ of ‐ erp.html Enterprise Resource Planning: Is It Necessary?
process which has already implemented in a compa ny has to be re-engineer ed to
process which has already implemented in a compa ny has to be re-engineer ed to

process which has already implemented in a company has to be re-engineered to match with ERP requirements. It is of course another big issue for a company. Meanwhile, training cost for the employees is also a big deal for the company.

The length of installation time is another problem in implementing ERP. Installation takes between one and three years (21 months on average). Rolls-Royce, for example, needs more than two years to implement SAP (an example of ERP software). 7

two years to implement SAP (an example of ERP software). 7 4. Case Study – SAP

4. Case Study – SAP Implementation in Rolls ­ Royce 8

Rolls-Royce used more than 1500 systems before the ERP system was implemented. These stand-alone systems of course make it difficult to maintained and developed. They also did not provide accurate, consistent, and accessible data, which was required to make a good decision and performance assessment. This condition also caused various departments in Rolls-Royce worked in isolation, since the system is not integrated to all departments.

7 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.111.7702&rep=rep1&type=pdf

8 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.111.7702&rep=rep1&type=pdf

Enterprise Resource Planning: Is It Necessary? Page 4
Enterprise Resource Planning: Is It Necessary? Page 4
Rolls-Royce then decided to implement ERP in its system. In 1998, the ERP project in
Rolls-Royce then decided to implement ERP in its system. In 1998, the ERP project in

Rolls-Royce then decided to implement ERP in its system. In 1998, the ERP project in Rolls- Royce was started. In the implementation process, some problems occurred. The problems can be grouped into three areas: cultural, business, and technical difficulty.

In cultural areas, the implementation of ERP was not really in some departments. This is understandable when a new system is replacing an old system, since it means the employees have to adjust their usual work to match with the new system. In addition to that, in business areas, the existing business process at that time had to be adjusted in order to fit with SAP. This ultimately changed the way Rolls-Royce does business. In technical area, the team had to deal with data accuracy issues, especially duplication of data, when the new system required the retrieval of old data that has to be normalized, screened, and stored within the new system repository.

However, the project was considered successful, since Rolls-Royce was able to solve all the issues occurred in the implementation process. Not only that, Rolls-Royce also successfully identified possible risks that could endanger the overall project. By using ERP system, in this case SAP software package, Rolls-Royce’s ability to deliver on time will improve customer satisfaction and confidence, which should lead to an increase of orders in the future. The system will also improve the connection in the supply chain, as transactions will be made much easier via the use of electronic communication.

5. Conclusion

Although ERP system implementation is very costly, in terms of investment made in money, time, and human resources, it also has major advantages when a company decided to implement it. And, if it is implemented, used, and maintained correctly, actually all the disadvantages should not exceed the expected value of implementing ERP system. However, companies that consider implementing ERP system still have to do a cost-benefit analysis to decide whether the implementation project should be done or not.

decide whether the implementation project should be done or not. Enterprise Resource Planning: Is It Necessary?
decide whether the implementation project should be done or not. Enterprise Resource Planning: Is It Necessary?

References

Journals

1. International Journal of Production Economics. Enterprise information systems project implementation: A case study of ERP in Rolls-Royce. Accessed on 10 April 2010 at:

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.111.7702&rep=rep1&type=pdf

2. Journal of Applied Business Research – Fourth Quarter 2006. New Fuzzy Dynamic Evaluation for ERP Benefits. Accessed on 10 April 2010 at: http://www.cluteinstitute-

onlinejournals.com/PDFs/2006475.pdf

3. Operations and Information Management Department – The Wharton School of the University of Pennsylvania. ERP Investment: Business Impact and Productivity Measures. Accessed on 10 April 2010 at: http://opim.wharton.upenn.edu/~lhitt/files/erp.pdf

4. Pacific Asia Conference on Information System. The Impact of Organizational Culture on ERP System Implementation: Lessons from Jordan. Accessed on 10 April 2010 at:

http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1003&context=pacis2009

Websites

1. Exforsys Inc. – Execution for System. The Advantages and Disadvantages of ERP. Accessed on 10 April 2010 at: http://www.exforsys.com/tutorials/erp/the-advantages-and- disadvantages-of-erp.html