NUS DSC2006 Term Paper October 08

National University of Singapore
Operations Management DSC2006
Academic Year 08/09 Semester 1 October 2008
Limited Literature Review Term Paper

Enterprise Resource Planning

Introduction

This paper aims to categorise and review all the recent relevant literature available on the topic of Enterprise Resource Planning (ERP). ERP stems from the Material Requirements Planning (MRP) systems where material resource and time requirements are derived from the demand schedule of the final product. MRP systems essentially address the three decision areas of the type, amount and timing of materials and components needed in manufacturing. This is to work towards increasing the flow of raw materials in production processes and decreasing inventory costs while meeting demand. ERP systems build on that to include areas of the organisation beyond manufacturing; standardising records across the different departments of a company like finance, sales, inventory control and human resource to improve operational efficiency.

Literature Review and Discussion

In his paper, Mabert (2007) discussed the history and adoption of MRP systems over the late 20th century while Jacobs and Weston Jr. (2007) outlined the history of the development of ERP, its relationship with MRP and current advancements in the system. Improved technology has led to the current increase in implementation of ERP systems but Jacobs and Weston Jr. (2007) felt there has been little research in the field that can be applied to real world manufacturing and that the actual solutions applied in MRP have not changed since the 1970s. This casts doubt on the benefits of adopting ERP systems and the following reviews of relevant papers will analyse the many studies that have been done regarding the impact and gains from implementing ERP systems.

In the research by Stratman (2007), the link between the strategic direction of a company and the extent of benefits gained from integrating ERP systems was investigated through the use of surveys. The initial review of existing research suggested that there was no guarantee of a return on investment with the successful installation of an ERP system. There were a few hypotheses investigated in the research. Mainly, it was about whether organisations with a focus on their operations will experience a bigger gain than those that focus on the market and customer relations. It was also hypothesised that large firms with complex business environments will be able to reap greater rewards from ERP implementations than small firms.

The results of the study strongly supported the hypothesis that operationally focused firms will receive a greater benefit from ERP systems. In the research, this was attributed largely to the fact that ERP systems are primarily designed to increase efficiency through automated production decisions and transmission of manufacturing related information. However, there was little support found for the hypothesis that large firms will benefit more from ERP systems. The explanation suggested by Stratman (2007) was that large firms might already have a previous automated planning system in place and therefore the magnitude of improvement observed was not as large as in a small firm.

There were however some limitations to the study that the paper brought up. First of which was that data was only collected from one person in each firm. There was the possibility of inaccuracy or biasness inherent in the opinion of the respondents. It was stated in the paper that many of the respondents were managers and executives who were responsible for the ERP implementations and thus might have overstated the extent of benefits arising from ERP systems. This could have been improved by gathering factual data and statistics from the firms to authenticate their opinions. Another area of concern was that the evaluation of the beneficial impact was only done at one point in time, and that was at the time when the survey was done. Stratman (2007) acknowledged that a more extensive study over a longer period of time would be able acquire more data to further demonstrate the links between the different firm types and the associated improvements. Lastly, the research did not gather any data that could be used to test the relationship between improved operational performance and improved competitive advantage. This is important as a large investment in ERP systems would probably need to be justified by a corresponding competitive and economic advantage over firms that do not have ERP systems.

The following paper will thus be reviewed mainly upon its evaluation of the long term impact of ERP systems on a firm using stock and profitability performance statistics, complementing the data shown in the preceding paper and addressing its weaknesses.

In the research paper by Hendricks et al. (2007) the long term financial impacts of ERP implementation are studied alongside other enterprise systems including Supply Chain Management and Customer Relationship Management. The hypothesis was that investments in ERP systems should lead to relative improvements in financial performance of a firm when compared to firms that have not installed ERP systems. The effects of investment in ERP systems were observed over a period of five years which included both the period in which the system was implemented and also after the implementation. The measures used in the study include the comparison of long term stock price effects and overall profitability reported by the firms in their financial statements. This improves the reliability of the research findings as both measures should support the same conclusion about the effects brought about by ERP implementation.

The results of the study did not show a strong improvement of performance in firms that had adopted ERP systems when compared to firms that have not installed ERP systems. Even though profitability data showed noticeable improvements and were slightly supportive of the hypothesis, the stock price data had displayed a statistically insignificant increase in performance. Hendricks et al. (2007) concluded that even though the results did not point to a strong correlation between ERP implementation and comparative performance increase, this is sufficient evidence to support the implementation of ERP systems as a positive improvement and worthwhile investment as there was no negative performance change associated in the results. There was also some evidence in the results to suggest that early adopters of ERP systems benefited more than later adopters, this is possibly due to the competitive advantages over the other firms without ERP enjoyed by the early adopters.

Considering the results from the two statistical studies above, it is seen that a firm should analyse their business structure in detail before embarking on ERP implementation projects as it is a long and complex process with high costs and returns are definitely not guaranteed.

It is interesting to note that in the results distribution reported in the study there was an exceptionally high number of firms that had achieved returns greater than 100%. Even though the overall study result did not show a significant improvement caused by ERP implementation, in these exceptional 20 companies out of the sample size of 186 the effects have been tremendous. Further research could thus be done on these companies to perhaps discover the reason for this trend. The reason could be a more efficient implementation process or a more suitable business environment for ERP systems, any result from such a study would be potentially useful in the study of successful ERP system implementations. Conversely, the firms that have been identified as having very negative returns on their investment in the study could be looked at to determine possible reasons for the failure in implementing the ERP system.

However, a significant limitation of this study would be the fact that financial performance of a company can be affected by many factors and that it is uncertain whether all or even most of it can be attributed to the implementation of an ERP system. Therefore, a specialised evaluation system to determine the success of ERP implementation would be useful. The following is a review of such an effort in developing an evaluation system.

In their paper, Wu and Wang (2006) asserted that the end user satisfaction is a good surrogate measure of ERP implementation success with support from previous research. However, Wu and Wang (2006) felt that measures of user satisfaction developed for the conventional data procession environment was not fully appropriate for the different ERP context and thus set out to propose a separate instrument for the purpose.

In the process of developing their instrument, Wu and Wang (2006) generated a list of items that were of importance in evaluating the satisfaction of users from reviewing previous research papers. The three main areas were found to be the evaluation of the ERP system product itself, the evaluation of user knowledge and involvement in the system and lastly the evaluation of the ERP project team and their service. Many checks were employed in the research to confirm the importance of each item used in the instrument. These included a pilot study and a few mathematical analyses.

All tests for validity and reliability of the instrument were eventually passed and that confirms the potential of it as a useful tool in evaluating ERP implementation success. Wu and Wang (2006) concluded that the three main factors surveyed in the instrument are mutually reinforcing elements of end user satisfaction of the ERP system and should be viewed as a whole instead of separately. The paper also brings up an advantage of using the proposed instrument – user satisfaction measure is considered as a non-threatening mean of evaluating ERP success when compared with measures such as personal performance measurements and would thus be more easily accepted.

Limitations that are reported in this study include the fact that the research was done in Taiwan and thus may be inaccurate or less relevant in other regions. Thus, further standardisation across regions in the industry regarding the evaluation of effectiveness in ERP implementation could possibly arise from this research. Wu and Wang (2006) also acknowledged that having satisfied users is only one indication of a successful ERP system and that views from various stakeholders from higher management would be required as well. This instrument could thus be viewed as complementary to the research methods employed by Stratman (2007). By including both the opinions of the ultimate end users and also the views of managerial respondents in a firm, a better in depth evaluation of the effectiveness of an ERP implementation can be gained.

Conclusion

In conclusion, recent developments have caused a large increase in the adoption of ERP systems (Jacobs and Weston Jr., 2007) and thus attention on its profitability has increased as well (Wu and Wang, 2006). Opinions are still varied on the benefits of implementing ERP systems (Stratman, 2007) but most research points to the investment as being at least marginally beneficial (Hendricks et al., 2007). Methods of evaluating the success of ERP systems are also being developed and it is widely agreed that multiple data sources and perspectives drawn from different levels in a firm will have to be taken into account for an accurate analysis (Stratman, 2007; Wu and Wang, 2006).

Term Paper Conclusion

In pursuing the completion of this term paper project I have acquired a set of skills that would undoubtedly be useful in the years ahead. These include the experience gained in searching for, speed reading through, and referencing journal articles.

Some problems met include the highly technical nature of the journal articles. They become hard to understand especially when complex mathematical theories are used. However, the introduction and conclusion found in the articles usually provide a rough idea of what the processes are trying to achieve.

Whilst trying to decide on a topic for the paper, the amount of reading done on various other topics have opened my eyes to a whole world of resources beyond textbooks, lecture slides and the internet. There are already materials I have stumbled upon that are relevant in other modules. The currency of the information available is also of much interest, textbooks are reviewed only once in a long while and fail to reflect the constant additions and changes experienced in the industry today. The project has been a positive experience overall and I appreciate the chance given to do independent exploration of the operations management topics.

References

Hendricks, K. B., Singhal, V. R., & Stratman, J. K. (2007). The impact of enterprise systems on corporate performance: A study of ERP, SCM, and CRM system implementations. Journal of Operations Management, 25, 65-82.
Jacobs, R. F., & Weston Jr., F. C. (2007). Enterprise resource planning (ERP)—A brief history. Journal of Operations Management, 25, 357-363.
Mabert, V. A. (2007). The early road to material requirements planning. Journal of Operations Management, 25, 346-356.
Stratman, J. K. (2007). Realizing Benefits from Enterprise Resource Planning: Does Strategic Focus Matter? Production and Operations Management, 16(2), 203-216.
Wu, J. H., & Wang, Y. M. (2006). Measuring ERP success: the ultimate users’ view. International Journal of Operations & Production Management, 26(8), 882-903.