Critically discuss the relevance of the use of ERP systems within Small to Medium sized enterprises (SME's) in UK, identifying its strengths and weaknesses.
Enterprise Resource planning (ERP) have become a vital strategic tool for small medium enterprises (SMEs). Enterprise Resource Planning (ERP) has also become one of the competitive advantages for companies around the globe and the dynamic force driving the process of global integration through information (Nikookar et al, 2009). There are major benefits and downside to ERP implementation but various benefits its produces such as real time information updates, integration of data, better administration etc, has made it possible to use for every organisation. Since ERP can merge all these entities together, it will in the long term develop sustain growth and provide feasible advantage for SMEs. The ability to succeed is very challenging and SMEs need to stay ahead if they want to compete in the current market. In addition to today's service economy, small business owners desires closer control over their complex and specialized tasks involved in sales, services, supplier relationships, and working capital management. There is a market for enterprise resource planning software (ERP) to SMEs retailers. Decisions to implement ERP systems are long term goals for SMEs. The implementation process or this system can take up to 2 years for SMEs. Larger organisations tend to implement this within first year due to their large resources. The trend in information systems is towards implementing integrated enterprise software. These are not customised packages designed for a specific organization, but they are generalized systems that incorporate the best business practices in use, called enterprise resource planning (ERP) system(Hall,2007).
Before we go into the relevance use of ERP system, we need to remind ourselves the meaning and definition of SMEs in the UK. Small and medium enterprises (SMEs) are companies whose turnover falls below certain limits. Especially in the European Union and USA, the term SME is principally used. However depending on the company sizes or number of employees working for the organisation, they can be classified as either a small enterprise or medium enterprises. E.g. in Germany, SMEs are companies or organisation who limits their employees to 250 where as in Belgium, this could be limited to 100 employees. But now the EU (European Union) has started to standardize the concept. Its current definition categorizes companies with fewer than 50 employees as "small", and those with fewer than 250 as "medium” (European commission, 2003). However, SMEs frequently have difficulties in obtaining capital or credit, particularly in the early start-up phase (esep.co.uk, 2005). Their restricted resources may also reduce access to new technologies or innovation. Therefore, support for SMEs is one of the European Commission's priorities for economic growth, job creation and economic and social cohesion (ec.europa.eu, 2009). According to the Department for Business Enterprise & Regulatory Reform (BERR)'s, in 2007, the UK economy was 99% SMEs. So out of a total of 4.8m UK businesses, less than 1% were large corporations (i.e. over 250 employees) (buzzle.com, 2008). A number of researchers have attempted to define ERP systems in various ways. Here are some of the definitions which the researcher thinks are generic enough to understand the idea of ERP.
Malhotra and Temponi (2009) define ERP as a “system which integrates different components of computer software and hardware to enable information flow throughout the enterprise”.
Gelinas (2008) also defines ERP as “a system of software packages that can be used for the core systems necessary to support enterprise systems”.
Jessup and Valacich, 2006 also stated ERP systems are for companies who want to integrate business activities across department boundaries. ERP applications make information access easier by providing a central information repository
According to Al-Mashari and Al-Mudimigh (2003) as cited by Molhotra and Temponi (2009), an ERP system is “an information technology (IT) that integrates all information and processes of an organisation into a coalesced system that concerns how people and organizations access, collect, store, gather, summarize, interpret, and use information”.
From the definitions above, the common denominator is the use of database and information and integration of software systems for the company. ERP combine all of the departments' computer systems into a single integrated system which use a centralized database so that the sharing of information and communication all over the business is improved. Enterprise resource planning evolved from Materials Requirements Planning (MRP) and Manufacturing Resource planning systems (MRPII) and since its introduction in the past has become very useful for small business. Since SMEs want to compete with large organisations, the need for information is constantly growing and technology is improving on expected basis. MRPI used marketing sale projection in combination with the production schedules, to plan for raw material purchases. MRP II expanded these capabilities and included forecasting and planning for all manufacturing resources, which enclose labour and overheads. The system has been integrated with the accounting and finance function to produce cash forecasts and other budget information (Moscove, 2003).Traditional MRP II evolved in time to the ERP systems which are multiple software packages. The term ERP was coined (Hall, 2007) by the Garner Group and has become widely used.
The remainder of this discussion is as follows: identifying ERP strengths, weaknesses and analysis and finally the conclusion.
Identifying ERP strengths, weaknesses and analysis
For an ERP to be effective, all the components need to be integrated with each other, otherwise information gets lost, not entered correctly from one record to another, or duplicated (Wood and Sangster, 2005). For large organisations, ERP pose a lot of advantages in the long term when the implementation is completed. The functionality to merge all information under a centralised database reduces cost and the company can start to see large profit margins. Integration can be seen as an advantage to small business as its aim is to reduce data redundancy and data entry. This is classified as a huge benefit as the main aim is to merge all related data from different department to a centralised database. ERP integration can also increase the timeliness for information. E.g. in a manufacturing industry, integration cannot only shrink the timeline but also reduce the amount of inventory that needs to be carried out in the stockroom (plantengineering.com, 2002). The integration process also helps eliminate the need to manually enter information already in one system to the other. Another major advantage to ERP system is the integration with accounting applications. It can help integrate the cost, profit and revenue. ERP can also act on how products are produced and allows the company an indication on how these products can be tracked and distributed ERP systems uses modules to integrate its business processes. Baltzan and Phillips (2008), classifies ERP under 2 components. These are Core ERP components and Extended ERP components. The Core ERP components are the default or traditional components which are found in most ERP systems. Examples are Accounting and finance, production and materials management, human resources etc. The Extended ERP components are the extra modules a small business would like to add to their needs e.g. business intelligence, customer relationship management (CRM) etc. Depending on the enterprise activities and the size of the business, some of the components will not be needed or ERP systems could have many modules. Some of these will include custom finance applications, marketing tools, management of internal controls, trace and serialization etc.
According to Barny (1995) as cited by Lengnick-Hall et al (2004), Competitively valuable resources and capabilities enable a firm to capitalize on market opportunities and avoid threats adroitly, efficiently and in ways that create value for customers and promote customer loyalty. Implementing ERP system for small business means value and enables the SME to develop better customer relation with their customers. Not all small businesses can afford to implement ERP system so there is better information flow between the small business entire supply chain and this is better processed than legacy systems. Another aspect of ERP providing a competitive advantage is through the complexity and integration process. As this involves business processes re-engineering, it may take years to refine the structure of the organisation but when completed, it develops a strategy to follow for the small business (Beard and Summer, 2004). ERP systems also makes the company more profitable so hence the company involved can pass on the cost savings achieved to its customers through various means and also provide the company an incredible competitive advantage (Baltzan and Phillips, 2008).
A common problem facing small companies is the ability to maintain a consistent business operation across various departments. When ERP is implementing and a department chooses to opt out, there is no consistency within the organisation so hence information flow across various departments becomes difficult. ERP systems can be beneficial as it provides the small business with consistency. This is usually achieved by providing a method for the effective planning and controlling of all resources required within the service organisation (Baltzan and Phillips, 2008). Another reason for consistency within ERP system is that SMEs need to replace legacy systems and improve its efficiency. Running a legacy system in the long term can affect a small business as they will not be able to cope with the competition with the other competitors in terms of the support and products that they offer. Another key strength of ERP systems is that, they are built on top of a relational database which enables a reliable and rapid circulation of the data between the modules and eliminates the need for multiple data entry and much of the error checking that data migrations between legacy systems traditionally brings (Shanks et al, 2003).
Other strengths or ERP systems are as follows:
* The use of a centralized database. The database stores information only once, eliminates data redundancy and inconsistency, and makes the data accurate;
* Produces greater flexibility in work practice and increase in staff efficiency, meaning that similar numbers of staff are able to cope with volume of business.
* The ability to streamline the entire financial reporting process(Hall,2007)
* It is much easier for the IT department because only one set of skills is necessary as applications and platforms are common;
* It is easier to estimate an overall project cost because the vendor could make an overall estimate price easier and quicker than all the vendors of best of breed application;
* Potential benefits to management through improved planning and decision making process;
* Future cost reduction after the ERP system is implemented such as reduction in inventory and employees costs (Bagranoff et al, 2008).
According to Chou and Chang (2007), “the failure rate of ERP implementation ranged from 40 percentages to 60 percentages”. This high rate figure could be attributed to the difference in interests between customer organisations that aim to provide the optimum solutions for business problems and ERP vendors who prefer a generic solution applicable to a broader market. From a technological point of view, ERP is integrated with hardware and software during the implementation stage. The integration is very expensive and SMEs cannot afford such a huge loss at this stage. Florida's Palm Beach County School paid US$ 25 million to install a PeopleSoft ERP platform, according to Computerworld (Careless, 2007). The Implementation of ERP is a very time consuming, expensive and arduous task of information technology. Due to this constraint, selecting an ERP vendor for SMEs need to be thorough and SMEs must reconcile the technological imperatives of the enterprise systems with the business needs (Nikookar et al, 2009).In addition, many SMEs find out during the later stages that their chosen ERP solution does not meet their expectations. Despite improvements made on ERP systems, it is known that many of the implementation fails. According to Gartner research as cited by Baltzan and Phillips (2008), “the average rate for an ERP project is 66 percent”. The software selection stage for ERP can be very difficult and SMEs must only consider ERP if this will fit within their business structure. Other weakness that can affect the use of ERP systems for small to medium sized businesses are (Hall, 2007):
* Poor project management: the implementation of a ERP system is a enormous process which consumes a lot of time, money and resources, for this a good project management is an essential phase ;
* Opposition to change from the employee: to be successful all the process of ERP implementation has to have the full approval of the entire business;
* Choosing the wrong ERP vendor: massive problems could appear if the system is not compatible with all the business processes;
· Data conversion: the risk comes if the data are corrupted and inaccurate, in this situation the human intervention and data rekeying is likely to happen;
In summary, the ability for a small business to implement a successfully ERP system is of significant important. ERP systems do not come cheap and according to Meta group, it takes the average company 8 to 18 months to see any benefits in ERP systems (Baltzan and Phillips, 2008). The implementation of ERP is lengthy and complex and requires significant investment in consulting the software, which is usually doable only for very large corporations (Andriole, 2006). The issues that keeps arising is do SMEs need ERP? Some SMEs have profited from this system but there is still uncertainty among other businesses. Many small businesses either do not have the sufficient resources or are not willing to commit a huge fraction of their resources due to the long implementation times and high fees associated with ERP implementation (Cragg & Zinatelli,1995; Nah & Lau, 2001). For an SME to use ERP systems, they need to understand what the whole process involves and the duration and expertise needed. Successful implementation of ERP projects requires attention to both technical and social dimensions and their interaction within an environment of managed change (Ash and Burn, 2003).
ERP systems have the potential to develop into a competitively important investment as long as it is integrated within the small business culture and learning capabilities. Integration is a different approach from which vendors the SMEs consult. Some vendors would implement ERP to fit into the current business structure and other vendors will ignore the organisational needs and deploy a system which is a make or break for the small business. According to Hall et al. (2004) explains that for a small business to achieve long term competitive advantage, they will need to follow the four listed things:
* One, they must leverage ERP connections to enhance the structural, relational and cognitive dimensions of their social capital
* Two, they must be able to use their social capital to build their intellectual capital and thereby have a superior base of knowledge with which to compete
* Three, firms must be able to transform their ERP systems to conform to new insights and subsequent changes in the social system
* Fourth, firms need to be able to change their information systems to accommodate new avenues for competitive value that originate beyond operations activities
One of the biggest problems SMEs must look into is the cost associated with ERP systems. The price to pay for a successful ERP implementation can range between hundreds of thousands to millions of pounds. The cost includes consultants, software, hardware, internal audits, installation, training etc. SMEs must produce a detailed report highlighting all the cost that is associated with the ERP implementation and other risk factors should not be underestimated. SMEs must also select an appropriate vendor for their implementation. Choosing a vendor with a good reputation will not lead to communication breakdown as some ERP implementations can break down half way through the stage due to a number of reasons. Some vendors are not reliable or are declared bankrupt, hence leaving the small business in real financial doubt.
ERP systems produce a better operation including eliminating legacy system problems, and improved coordination efficiency in production (Hall et al, 2004). The relevance of the use of ERP systems depends on the SME. ERP relevance is not for every SME and they will need to conscious about the potentially powerful role of ERP systems.