PhD Research Proposal submitted to The Center for Applied ICT at CBS

By
Prabhakar Tunuguntla

Research Title:
“Developing a cost efficient lean ERP model for manufacturing SMEs”

Abstract
Enterprise Resource Planning (ERP) with its roots in Inventory control, over the time evolved as a
management tool giving organizations a great competitive advantage. Even though most of the
large corporations adopted ERP or some other enterprise system (ES) to gain this advantage, still
many of the Small and Medium Enterprises1 (SME) are yet to adopt ERP. I believe that one of the
major stumbling blocks in adopting ERP by SMEs is high Total Cost of Ownership (TCO)
particularly upfront investment in buying software and hardware.

I am interested to focus my research to develop a cost effective ERP for manufacturing SMEs. I
perceive a solution in which lean manufacturing principles2 are integrated to improve the process
and reduce total carrying costs and enabling firms to respond quickly to market fluctuations. Further
I see the new system as combination of Push (ERP) and Pull (Lean) strategies. Where Push
strategy is used to control raw material inventory, cross functional coordination, integrate financial
data and logistics. Where as pull system is used to manufacture products to order, to optimize
process, job scheduling and in process inventory control thus enables firms to respond to market
fluctuations quickly.

Reasons and purpose for undertaking the project

I am associated with manufacturing industry for the last 14years, during this journey I worked in two
ERP implementations. One is at MNC with operations across the globe where most of the
processes are standardized; few standard products are produced to stock and with strong financial

1
As classified by European Commission a Small Enterprise is one with less than 50 employees and a turnover of up to
10millon euro. Where as Medium Enterprise is one with less than 250 employees and up to 50million euro turnover.
http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm
2
Lean manufacturing is a generic process mostly derived from Toyota Production Systems, which focus on elimination
of waste, increase profitability. Some the tools used are Kanban, Poke-Yoke, value stream mapping and Just in Time
methodology.

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backup. While the other implementation is at medium size enterprise where products are
customized according clients, made to order and mostly non repetitive and scarce financial sources.

In former case implementation was easy and completed as expected and is more effective. In later
case even after 2 years of official declaration of project completion uses legacy systems for some
products, all functionalities are not properly integrated and has huge in process inventories.
Presently I am associated with small start-up enterprise where i am working in selection of ERP
system to fulfill our expectations. This experience instills me to pursue research in this subject.

Current research in the field

According to Frantisek Sudzina, Björn Johansson3 Total cost of Implementation (TCI) includes
software licenses, hardware costs, programming changes and organizational changes. TCI
depends on company size, on the country and representation of IT department at board level. It
further revels that midsize companies spend 45% of TCI on software licenses while small
companies spend 43.15%. Also hardware expenditure in either 25.65% or 18.31% depends on CIO
representation at board level.

A recent research4 in SMEs conducted by Aberdeen consulting group stresses the need of ROI in
ERP investment. It concludes, while total cost of ERP is important to monitor and optimize, focusing
on TCO is no longer sufficient. It further revels that only 30% of SMEs successfully achieved ROI in
projected time line. Major sources of ROI are reduction in operational costs, increased profits,
reduction in general administrative costs and reduction in inventory costs.

In 2008 Panorama consulting group published a survey report5 on ERP which revels that only 13%
respondents are very satisfied with their company software implementation, 59% respondents say
implementation costs are more than initially assumed and only 21% realized 50 % or more of their
projected benefits.

3
Total Cost of ERP Systems Implementation in Danish, Slovak and Slovenian Companies
4
Measuring the ROI of ERP in SMB, Cindy Jutras, March 2009
5
This information was collected from December 2005 to November 2008. Respondents
represent 1,322 global organizations that have implemented ERP during this period and based
in all of the major regions in the world, with a majority operating in either North America or Asia
Pacific (31 percent each).

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Explanation of Hypothesis
SMEs are under pressure to reduce cost, improve customer response time, need to manage growth
expectations and improve overall customer satisfaction. This business pressure drives SMEs to
adopt one of ERP systems. At the same time they are worried about high upfront investment, loss
of business during transition phase from legacy systems to ERP and ultimately what if analysis of
failure. Further, success of SMEs lie in their ability to serve specific needs of clients and responding
quickly to market needs. Also I suspect ERP leads to standardization of process (according to
global standards) thus forcing Business Process Re-engineering which can differ from the previous
process where client’s specific needs are satisfied. Before selection of any particular ERP, firms
need to do process mapping of existing business process. This enables the firms to capture firm
specific competencies and perform gap analysis with respect to new process that has to be
adopted.
Hypothesis – 1a
Implementation of ERP systems leads to standardization across enterprise, which leads to loss of
some unique (firm specific) competitive advantages which are gained locally over the time.
Hypothesis – 1b
Most of the SMEs lacks highly skilled employees with respect to their bigger counter parts (due to
inability to attracts talent) thus requires application which are user friendly and quicker to learn
Hypothesis – 1c
It is important to do process mapping of existing business process before selection of ERP system.

Most of Small and Medium Enterprises are eager to adopt lean manufacturing principles to
be competitive in the market. At the same time they are interested to implement ERP because its
ability to integrate across the supply chain and bring transparency in the whole system. In order to
bring best part of both approaches lean principles should be integrated with ERP. This can be
achieved by uncoupling MRP engine from the ERP system using Kanban cards. Thus job
scheduling will be triggered by demand. Further job scheduling should consider the capacity
bottleneck resources in the line instead of capacities of individual resources.
Hypothesis -2
Introduce Kanban for job scheduling and capacity of bottle neck resource should be considered
while loading any other resources in the chain.

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 Research6 in the area of TCO of ERP suggests that TCO is proportional to company size.
Further it revel that average TCO in companies with size between $50million and $100million is
$1,081,869. As suggested by Frantisek Sudzina, Björn Johansson upfront investment is 65% of
TCO. It would be more practical for ERP supply chain partners to provide a solution which can
lower the initial barricaded. Also reduce the lost business opportunities during the deployment
phase. Even though ERP offering as SaaS (Software as a Service) has potential to become a low
cost (initial) solution but many SMEs don’t validate this concept. The main reason are security
concerns, complicated cost structure, lack of customization and application performance.
Hypothesis – 3
Each functional area will have different type of modules, single module from each functional area
will be clubbed together to make single ERP package depending on nature of business

Methods to be used

In case of pre & post implementation data collection quantitative survey will be used. In both cases
a draft questioner will be send to select manages of SMEs for checking reliability and content
validity of questioner. Then pre-tested questioner will be send to all sample respondents. In order to
arrive for logical conclusion statistical tools like SPSS will be used. While in case of data collection
during implementation phase, I am considering to work closely with few firms in order to have
firsthand information on implementation issues.

Some of the performance metrics that would be monitored during the research:
• Improvement in manufacturing schedule compliance
• Reduction in order2Ship cycle time
• Improvement in complete and on-time shipment
• Number of days of inventory for components & finished goods
• Reduction in inventory levels & Inventory accuracy
• Reduction in operational cost
• Reduction in administration cost

6
The Total Cost of ERP Ownership in Mid-size companies, Aberdeen Group July’07

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Work plan
1st half year: Studying market trends and needs in the area, refinement of research question and
methodologies. Creating list of manufacturing SMEs across geographic regions which are
interested in ERP implementation

2nd half year: Prepare questioner to gain insights into software selection criteria, major stumbling
blocks in adopting ERP by SMEs.

3rd half year: Working closely with selected few SMEs which are in the process of implementation to
understand possible pit holes in implementation.

4th & 5th half year: Gathering information on different performance metrics achieved by SMEs who
implemented ERP successfully. Start thesis preparation in 5th half year.

6th half year: Refining & completion of final thesis

Year - 1 Year - 2 Year - 3

Refine
research
question
insights into
pre-
implementation
stage
Study implementation process

Post implementation ROI

analysis

Gathering knowledge for the development of research subject

Preparation of Thesis

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