ERP for SMEs

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ERP for SMEs 1. Introduction

For the modern day corporate firms, Enterprisewide Resource Planning (ERP) systems have become an inherent necessity that cannot be obviated. With the increasing acceptance of ERP systems and the development of multiple ERP vendors with quality systems integrating all the functions of an organization in a central database, ERP adoption has increased beyond 70% among large enterprises. With impending saturation in the ERP market for large enterprises, most of the ERP vendors have turned to catering to the SME sector with customized solutions that tackle the problems of high cost of ERP selection and implementation and the inherent complexity involved in such systems. By means of offering cheaper and simplified solutions, flexible pricing policies, specialized functionalities and preconfigured systems based on best practices and cut down implementation times, ERP vendors have renewed their focus towards small and medium enterprises (SMEs) tremendously in order to capture a large pie of the huge untapped SME market the world over. Specifically, in the Indian context, SMEs have faced tough challenges post the economic liberalization which eased trade barriers and promoted disinvestments and deregulation. Before the economic liberalization in India in the 1990s, SMEs in India faced little competition and operated under a highly regulated business environment. However, following the economic liberalization, the Indian economy was opened up to foreign corporate and hence, Indian SMEs have been left with little choice but to adopt modern business practices and strategies to stay afloat to tackle renewed business challenges of compressed product development cycles, cut throat domestic and foreign competition and rapidly changing customer demands. ERP systems are a way ahead to create and sustain a competitive advantage not least because the custom packages designed by ERP vendors for SMEs are now becoming upwardly scalable in line with the growth of a SME. ERP adoption paves the way for SMEs to boost their overall brand image against their competitors and emerge as big players in the domestic market. A couple of cases in point are Jain Irrigation and Havells India. Jain Irrigation, a Mumbai based irrigation equipment manufacturing company, made four acquisitions overseas to gain access to new product lines and introduce those products in the Indian market. Havells India, on the other hand, acquired a European firm and integrated their key functions of sales and marketing by means of ERP systems. Of course, ERP offers other distinctive advantages like functional integration, as mentioned before, and streamlining of internal processes. However, ERP systems enable integration of supply chains and provide a common platform for exchange of information between suppliers and customers, which is a key takeaway. Also, ERP systems aid the incorporation of industry best practices which include increasing the visibility of business processes, establishing open and timely communication, linking databases across key organizational functions throughout the value chain and significantly minimizing documentation while ensuring necessary data traceability and availability. In spite of such distinctive advantages, SMEs have been unable to capitalize and make the most of their ERP implementations owing to unclear understanding of business objectives and the role an ERP system can play in achieving performance improvement and gaining a competitive advantage. Moreover, SMEs themselves lack a defined organizational structure and formal organizational procedures which form the core of efficiency as far as an ERP system is concerned. Finally, the change management scenario is also quite unique within SMEs. ERP users are less likely
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to have significant experience in operating complex computer systems and hence, training of users in ERP is of utmost priority. In addition, SMEs are marked by sub-optimized organizational procedures and changes are comparatively more welcome and gain acceptance faster as compared to large enterprises. This paper aims at reviewing the available literature on ERP systems for SMEs in order to identify and assimilate the benefits and risks associated with ERP adoption and further delve into the reasons of failure of ERP implementation. Finally, some conclusions and recommendations specific to SMEs are identified.

2. ERP Adoption: Benefits and Risks

The benefits of ERP adoption, particularly in manufacturing SMEs can be explained by means of the Technology-Organization-Environment (TOE) framework which identifies three groups of determinants: 1. Characteristics of the environmental context 2. Characteristics of organizational context 3. Characteristics of technological context 2.1 Environmental context The pressure exerted by the competitive market environment can result in ERP adoption as was the case illustrated for Indian SMEs post liberalization. In this context, a business which operates in a price sensitive market cannot afford high margins and would depend on an information management system like ERP for tight control of its production costs. Moreover, a SME operating in a strong growth market needs to be quite nimble to respond effectively to market changes and has to reconsider its business processes in order to deal with its rapidly increasing size. Further, the need to optimize its supply chain as a result of pressure from large companies to meet world standards in terms of quality, cost and efficiency requires SMEs to restructure their processes for which an ERP system capable of real time information sharing across all partners in the value chain is of utmost importance. 2.2 Organizational context The decision to adopt ERP systems would be followed, first of all, by selecting the appropriate ERP system to be incorporated. ERP system selection involves a study of the congruence or fit between an ERP system and the organizations processes which allows the SMEs to avoid the shock of an in-depth process reengineering. In such a case, if the business processes of a SME are very idiosyncratic, then there would be little inclination of the organization to adopt ERP and little gain even if it ended up doing so. In terms of the contrast in the motives for adoption of ERP systems by large enterprises against SMEs, criteria relative to flexibility play a vital role. Such criteria were judged critically by SMEs as these firms inherently tend to be more flexible and ERP adoption could end up being a bane in terms of a SME losing its inherent strength of being able to efficiently accommodate changing customer demands.
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Other factors pertaining to an organization include the size, centralization, formalization and specialization of organizational functions. Larger organizations would be able to facilitate the initiation, adoption and implementation of new technologies like ERP. In addition, an organization which is highly decentralized would tend to adopt ERP adoption to facilitate better and quicker decision making. Finally, with regards to formalization in terms of administrative or bureaucratic complexity, the need for increased data visibility across the value chain would be facilitated primarily by means of ERP for a formal organization. 2.3 Technological context The need to improve the performance and efficiency of ongoing operations is an important incentive for ERP adoption. In such a scenario, renowned ERP vendors like SAP and Oracle have developed targeted solutions for SMEs which facilitate the migration of legacy systems to achieve faster integration. Another benefit for ERP adoption from a technological perspective is the need to migrate data and systems and inhibit the functioning of the organization in the form of silos. Adoption of ERP systems should not be undertaken unless they are in alignment with the competitive environment, strategic objectives and organizational structure of SMEs in order to gain maximum benefits out of the ERP adoption exercise. 2.4 The Flip Side of ERP Adoption As mentioned in the text earlier, ERP adoption does not guarantee that the perceived benefits of ERP will be realized to the full extent. This is because of the potential risks involved in ERP adoption which prevents a project from delivering on some or all of the expected benefits. The risks associated with ERP adoption fall into the categories of organizational fit, management structure and strategy, skill mix, user involvement and training, software systems design and technology planning integration. 2.4.1 Organizational Fit As mentioned in the previous section, adoption of ERP should be subject to an analysis of the fit between the organizational processes and the system itself. Adoption of standard ERP systems may put into effect a rigid arrangement on a company which threatens a core competitive advantage of theirs, the flexible nature. Hence, SMEs need to be responsive to the transformations in their business environment in order to conform to the requirements of their customers and suppliers. Moreover, a particular ERP system would rarely fit into the business processes of a SME in its entirety. The organization needs to alter its business processes to adapt to the requirements of ERP system in addition to tailoring the ERP system to suit the organizations processes. Other business process risks include risks of failure to redesign business processes, misalignment of business processes and failure of support cross-organizational design. Apart from this, other off-the-shelf softwares may have overlapping business modules which perform similar tasks and duplicate data entry points resulting in data inconsistencies. Other risks associated with the Organizational fit aspect are listed below:
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Special needs of a particular SME not met by the ERP system ERP system does not meet the future needs of the company Lack of flexibility on the part of the ERP system under exceptional circumstances ERP vendor is not committed enough to successful implementation

2.4.2 Management Structure and Strategy ERP adoption and the subsequent implementation must be coherent with the strategy and objectives of an organization. The entire process runs through multiple stages and requires dedicated efforts and focus on the part of the project team and the top management. A lack of proper monitoring and control or lack of effective project management methodology could severely impact the performance of the organization. Such a situation can result because of a decentralized decision making process in which the decisions taken are not backed effectively by the top management. 2.4.3 User Involvement and Training This aspect is of special importance for the adoption of ERP systems by SMEs owing to a lack of competency across the organization or a general lack of resources to perform specific tasks. Adoption of ERP systems involves change management which is often taken with a pinch of salt by the organizations employees. ERP project managers must understand the efforts involved in change management and effectively communicate the benefits of ERP adoption to all employees in the organization and not just the ERP user base. In addition, appropriate training of the users is of utmost priority particularly in the context of SMEs where resources are scarce. Other associated risks are listed below: Lack of full-time commitment of customers to project management and project activities Lack of sensitivity to user resistance Failure to emphasize reporting Lack of discipline on working with the system 2.4.4 Skill Mix A project team undertaking ERP implementation requires a special mix of skills ranging from change management, business process reengineering (BPR), risk management and technical skills and needs to employ these skills before and after the ERP implementation. In such a context, the risks associated are as below: Insufficient training Failure to effectively merge internal and external expertise Lack of business analysts with knowledge of both business and technology Insufficient internal expertise Inadequate skills in negotiating contracts Unable to recruit and retain qualified ERP experts

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ERP for SMEs 3. ERP Implementation

The published research on ERP implementation reemphasizes the need to understand and develop a clear picture of business processes as a critical aspect in successful implementation of an ERP system. An ERP system does not operate using functions but rather adopts processes, which are activities that involve several modules. Thus, the competitiveness among enterprises is not only judged based on the quality of products but also on the efficiency of internal processes. Business processes, by their very nature, are not static and require monitoring on a continuous basis to identify deficiencies and improvements. Hence, organizations, particularly SMEs, adopting ERP need to adapt the enterprise to the software package and tailor the software package to tie the strings. Thus, alignment of business processes within the organization is a necessity and is affected by various environmental aspects like existing information systems before ERP implementation and the organizational culture. A business process management lifecycle can be structured in the following phases: Assessment and modeling of organizational structures Assessment and modeling of business processes (Business Process Engineering) Analysis of weaknesses Modeling of advanced business processes (Business Process Re-engineering) Control of business process (Business Process Simulation) Implementation for the enterprise (Change Management) Management and performance monitoring (Business Process Management)

The above business process management lifecycle steps could be translated into four phases in a typical ERP life cycle: Chartering: Decisions defining the business care and solution constraints Project: Getting system and end users up and running Shakedown: Stabilizing, eliminating bugs, getting to normal operations Onward and upward: Maintaining systems, supporting users, getting results, upgrading and system extensions

A cost-benefit analysis of the ERP implementation cycle is shown below in Figure 1 which suggests that as the implementation schedule lengthened, the cost increased dramatically while the success achieved increased only to a limiting point beyond which there was no significant achievement in benefits. The primary factors affecting the implementation of ERP in SMEs of developing countries like India are as below: i. Top Management Support The ERP implementation project, as suggested earlier, must align with the strategic business goals of the enterprise. The top management should be the driving force

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behind the project and must lead the way with a willingness of mindset change and accepting that a lot of learning needs to be done at all levels.

Figure 1: Cost-Benefit Analysis for ERP implementation

ii.

Clear goals and objectives Clarity in the business goals and objectives at the outset of ERP implementation is essential to direct organizational and project team efforts in the right direction. User involvement and participation User involvement and participation in the ERP implementation process is usually decided by the importance and personal relevance of the system to the particular user. This could be enhanced by proper communication of the benefits of the ERP system across all levels in the organization. Project Champion The Project Champion plays a critical role in driving consensus and overseeing the entire lifecycle of project implementation in terms of legitimizing changes and ensuring that problems occurring during implementation are tackled effectively. Project cost Many SMEs do not have sufficient resources in place to dedicatedly commit to the ERP implementation process because of its longevity and complexity. Effective change management A successful and effective change management approach must focus on the proper integration of people, process and technology and constitutes an important aspect of the ERP implementation lifecycle in terms of realizing the benefits of ERP systems.

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vii. Project composition and leadership As mentioned before, the project team implementing the ERP system must possess a diverse range of skill sets with the proper training and development and must contain individuals who are committed to the project. Project management Project management should maintain adequate clarity in establishing and clearly defining the scope of the project. User training and education Proper training and education about the inherent logic and the overall concepts of ERP leads to a better and holistic understanding of jobs for the project team members in terms of how their work affects the project implementation on the whole. External consultants Being a complex and time consuming project, ERP implementation may require the expertise of external consultants who have presided over such implementations earlier. Information flow management Organized management of information flows and information sharing across all stakeholders is crucial for successful ERP implementation, especially for decentralized organizations with various branches. Proper package selection Selection of ERP package to be implemented requires careful attention prior to the implementation process in terms of the match between the system and the business processes of an organization. Vendors knowledge and support Selection of ERP vendors must be carefully done since vendors play a major role in shaping the ultimate outcome of the implementation. It is important for the vendor to be knowledgeable both in terms of business processes and the ERP functions. This problem is much more acute for SMEs who generally settle for vendors without the necessary competencies owing to high costs. Minimum customization It is inevitable that business processes in an organization need to be altered to fit the ERP system. However, from the ERP systems point of view, customization of the package to fit to business practices should be minimized as much as possible.

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ERP for SMEs 4. ERP implementation for Indian SMEs

ERP systems have been met with a skeptical and lukewarm response among Indian SMEs. Among SMEs in the manufacturing sector, for instance, only 15 % have implemented standard ERP packages for business process integration while 25% are still using spreadsheets for production planning and 50% are using in-house developed packages for production planning and control. The rest 10% are still using manual methods. Some specific issues with regards to ERP implementation in manufacturing sector SMEs are as below: i. Selection of ERP modules Most Indian SMEs in the manufacturing sector are not using the production planning, maintenance and quality management modules because of which ERP became most popular in the first place ii. Motivation for ERP adoption SMEs generally presume that ERP systems are affordable only for large enterprises and hence resort to information management softwares developed by local firms. In terms of the reasons for ERP adoption, replacing a weak current information system or to integrate the existing information systems are common motivators for ERP adoption. iii. ERP benefits For Indian manufacturing SMEs, ERP systems have led to reduced inventories, improved customer service, reduced planning cycle time and decreased lead time as the primary tangible benefits. All these factors have, in turn, led to reduction in cost in terms of achieving higher turnovers with the same manpower. Apart from the tangible benefits stated above, other intangible benefits include improved decision making because of availability of real time information, streamlined business processes and reduced information delay. iv. Return on Investment As a result of the tangible and intangible benefits stated above, the computation of ROI proves to be difficult when it comes to quantifying the benefits. Also, SMEs have differed in their realization of tangible against intangible benefits. v. Facilitators of ERP success Support from the top management has been identified as a major facilitator for the success of ERP adoption along with user involvement and participation, understanding of the underlying ERP concepts and strong and meaningful training programs. In the context of Indian SMEs, project execution competency and proper perspectives on products and vendors are two critical issues to address for successful ERP implementation. Other critical factors include the establishment of a proper communication channel among all stakeholders involved in the implementation and ensuring adequate technical infrastructure in place to support the ERP implementation process.

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In almost all the instances of ERP failures, it was recognized that there was hardly any manpower dedicated exclusively for the implementation of such systems and designated people were lacking in technical know-how. An important point to note in such companies is that users prefer a handholding approach even after sufficient training has been provided. In such organizations, management should negotiate with the vendor and arrive at an acceptable price for engaging external consultants and also provide their users with adequate training instead of ignoring the positive role of adequate training as they consider these as an additional cost to their already incurred cost of purchasing the package. In turn, ERP vendors need to realize that SMEs are different from large enterprises in terms of lack of sophisticated information management, frequent concentration of information gathering responsibilities to one or two individuals and lower levels of resource available for information gathering.

4 Conclusion
In conclusion, ERP systems are becoming increasingly commonplace in the SME space owing to the growing need to integrate functions and streamline business processes in such enterprises. The demands of the marketplace and those of the customers and suppliers associated with SMEs in the value chain have prompted SMEs to increasingly adopt ERP as a way of sustaining a competitive advantage in spite of the inherent risks involved. However, the implementation of ERP systems needs to be foolproof in order to gain the most benefits out of such a system. The risks involved in the adoption and implementation of ERP needs to be factored in objectively in order to attain a clear picture of the Return on Investment of such a significant IT investment.

5 References
1. Loh T.C., Koh S.C.L., Critical elements for a successful enterprise resource planning implementation in small- and medium-sized enterprises, Int. J. Prod. Res., 1 September 2004, vol. 42, no. 17, 34333455 2. Raymond L., Uwizeyemungu S., A profile of ERP adoption in manufacturing SMEs, Journal of Enterprise Information Management, Vol. 20, No 4, 2007, pp 487-502 3. Mukwasi C.M., Seymour L.F., Enterprise Resource Planning Business Case Considerations: A Review for Small and Medium-sized Enterprises, Journal of Innovation Management in Small & Medium Enterprises, Vol. 2012 (2012) 4. Deep A., Guttridge P., Dani S., Burns N., Investigating factors affecting ERP selection in made-to-order SME sector, Journal of Manufacturing Technology Management, Vol. 19, No. 4, 2008, pp 430-446 5. Upadhyay P., Jahanyan S., Dan P.K., Factors influencing ERP implementation in Indian manufacturing organizations: A study of micro, small and medium scale

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enterprises, Journal of Enterprise Information Management, Vol. 24, No.2, 2011, pp 130-145 6. Kale P.T., Banwait S.S., Laroiya S.C., Performance evaluation of ERP implementation in Indian SMEs, Journal of Manufacturing Technology Management, Vol . 21, No. 6, 2010, pp 758-780

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