Selection Process of ERP Systems

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Selection Process of ERP Systems
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    36 Business Systems Research Vol. 4 No. 1 / March 2013   Selection Process of ERP Systems Bálint Molnár Eötvös University of Budapest, Faculty of Informatics, Information Systems Department, Budapest, Hungary Gyula Szabó Dénes Gábor University of Applied Sciences, Budapest, Hungary  András Benczúr Eötvös University of Budapest, Faculty of Informatics, Information Systems Department, Budapest, Hungary Abstract Background:  The application and introduction of ERP systems have become a central issue for management and operation of enterprises. The competition on market enforces the improvement and optimization of business processes of enterprises to increase their efficiency, effectiveness, and to manage better the resources outside the company. The primary task of ERP systems is to achieve the before-mentioned objectives. Objective:  The selection of a particular ERP system has a decisive effect on the future operation and profitability of the enterprise.   The qualitative correlation between the size of enterprises, market position, etc. and the applied selection criteria for ERP systems should be analysed as to whether which criteria are used at multinational enterprises or at SMEs. Methods/Approach:  Our research is grounded in a literature review and case studies of everyday practice related to the introduction, implementation and roll-out of ERP systems. Results: The dominant critical success factor of ERP introduction seems to be “ERP software suitability”, “Information quality”, “ERP vendor quality”. Conclusion:  The set of criteria on one hand shows strong correlation with non-functional requirements codified in standards, and on the other hand with usual functional requirements for ERP systems.   Keywords:  Information System, ERP, Enterprise Resource Planning, Enterprise Architecture, Selection Criteria. JEL classification:  M, M1, M15 Paper type:  Research article Received:  20, July, 2012 Revised: 27, November, 2012 Accepted:  1, March, 2013 Citation:   Molnár, B., Szabó, Gy., Benczúr, A.  (2013 ). “ Selection Process of ERP Systems ”, Business Systems Research, Vol. 4, No.1, pp. 36-48. DOI: 10.2478/bsrj-2013-0004 Acknowledgements : The Project is supported by the European Union and co-financed by the European Social Fund (grant agreement no. TÁMOP -4.2.2/B-10/1-2010-0030). Introduction To highlight the  recent tendencies  in an economic crisis, we have investigated the trends in two EU member countries (Hungary and Germany) empirically and by publications related to business management and economics. The  research goal  was to discover the most recent trend in the applied method  of  selection processes  and the related  set of criteria in practice, and a qualitative analysis about the impact and frequency of use in practice. We have studied concrete examples, cases of ERP selection and introduction. The source and empirical material of research consisted of in-depth interviews  carried out by the research    37 Business Systems Research Vol. 4 No. 1 / March 2013  team, case studies description and elaboration performed by students, and publications appeared in scholarly periodicals, technical and business journals. The research has collected primary criteria, requirements against ERP systems out of the scientific, technical and business literature. Using the set of criteria the case studies were analysed. Because of the size of the sample, the research intended to create a qualitative  result as if which criteria, business and technical analysis methods were used in practice. To document and organize the results of research we concluded some tables that can be analysed by basic statistical methods to reveal some tendencies. The organization of the paper  : §2 provides a literature overview about ERP related issues as selection criteria and introduction. §3 describes the applied methodology of the research. In §4 we discuss  case studies related to the selection process of ERP systems in Hungarian and German companies. §5 discusses and concludes the result of research. §6 overviews of related works, §7   summarizes this paper and §8 provides a brief overview about the planned future work. Literature review There are several, concurrent definition and circumscription for ERP that we have investigated in a previous article (Molnár 2011). In the scientific and technical literature, the concept of ERP is widely discussed as the environment of technology rapidly changes as new architecture appears e.g. SOA, Cloud Computing etc. (Siegel and Shim 2005), (Yen and Chang 2002), (Bidgoli and Hossein, 2004), (Lassmann 2006), (Jacobs and Whybark 2000). A thorough bibliography and short discussions on literature of ERP systems can be found in (Esteves and Bohórquez 2007), (Botta-Genoulaz, Millet and Grabot 2005), (Jacobs and Weston 2007), (Nazemi, Tarokh, and Djavanshir 2012). The ERP system should cover the requirements of companies in various industrial sectors (Feuchtinger 2008). There are ERP systems that are dedicated to large and medium sized enterprises, to particular sectors as e.g. commerce or to companies having business functions overarching from manufacturing to sales and delivery (Eggert and Fohrholz 2009). We conclude that there are still individually developing  systems beside standard systems  within the industrial sector specific solutions. As there are several definitions or circumscription of ERP systems  as an information system in the literature we use the following definition attempt: organization-wide socio-technology, information system that provides information system services for the major business functions, namely human resource management, logistics in comprehensive term, i.e. including from sales and delivery to the production and its planning. The success or failure of implementing ERP systems is widely discussed in several publications (Ifinedo, Rapp, Ifinedo, and Sundberg 2010). There are a lot of ERP alternatives in the market (Wei and Wang 2004). The failure in selection of ERP system firstly leads to the failure of ERP introduction or an adaptation project or secondly to degradation of company performance (Liao, Li, and Lu 2007). The literature contains several viewpoints concerning what variables are required for implementation success or responsible for failure (Umble et al. 2003), (Asl, Khalilzadehb, Youshanlouei, and Moodd 2012). An ERP system is a social-technological system so that there are competing measurement approaches and concepts coming from research literature and practice. Some factors that can be encountered in the literature: 1.   User satisfaction (Al-Mashari, Al-Mudimigh, and Zairi, 2003; Mandal et al. 2002), (Ang et al. 1995; Yusuf et al. 2004). 2.   Intended business performance improvements (Al-Mashari et al. 2003; Hong and Kim 2002; Mandalet al. 2002; Markus et al., 2000; Yusuf et al. 2004). 3.   On time (Al-Mashari et al. 2003; Hong et al. 2002; Malbert et al. 2003). 4.   Within budget (Al-Mashari et al. 2003; Hong et al. 2002; Malbert et al. 2003). 5.   System acceptance and usage (Ang et al. 1995; Ang et al. 2002; Yusuf et al. 2004). 6.   Predetermined corporate goals (Al-Mashari et al. 2003; Umble et al. 2003; (Yusuf et al. 2004).    38 Business Systems Research Vol. 4 No. 1 / March 2013   Methodology The research approach as a methodology  was twofold; on one side we have based our research on srcinal empirical  researches, on the other side on literature review to complement our research. The extent of the search was not limited to scholarly journals, conference proceedings, doctoral theses, Web sites and textbooks. Our aim was to carry out a qualitative, empirical research . To make available enough empirical data, we have grounded our investigation in BSc. / MSc. theses  that were created on ERP at Col lege of Dénes Gábor and Eötvös University (in Budapest, Hungary) as students’ research project. In these projects, the fact finding and data gathering were conducted by prescribed methods. T he theses that provided a part of empirical data and materials of in-depth interviews are accessible and are available at request.  In addition, there was an empirical research  on the evolution of enterprise architecture of subsidiaries belonging to international companies and operating in Hungary (ELTE 2010). Beside companies situated in Hungary, the investigation covered the practice of ERP introduction at several German companies. By its approach, case study paradigm  as a research tool  is well suited to the study of Information System (IS) implementation, especially when the contextual environment is important and the phenomenon is temporary (Miles and Huberman 1994). The case studies paradigm  provides a sound basis for  scientific generalization  if it is correctly used. Case studies on the selection process of ERP systems in Hungarian and German companies Phases of ERP introduction The  samples in practice  demonstrate that the introduction and application of ERP is a longstanding process. The  selection of a proper solution  is a several year project that can be divided up into stages. The required activities are planned and monitored till the introduction and operation by vendors so that they ensuring a successful project execution (Feuchtinger 2008). In this study we define five stages  of introduction to take into account the practical experiences of case studies. The companies frequently encounter a decision situation how they can modernize the existing data processing system. There are three different ways: development , package procurement  and  renting or leasing, i.e . paying fees on monthly or yearly base  for the ERP services. In principle, open source ERP  solutions can be considered as a  reasonable alternative  of development from scratch; the alignment of concrete solutions to the business needs can be carried out through a customization project. The rapidly proliferating Cloud Computation  motivates the use of Open ERP  solutions as a kind of  renting  or leasing . A developed system may comply with requirements and it can be tailor made for specific business processe s; however it requires more resources (Ayağ and Özdemi r 2007). Before the decision between the package solution  and development , an analysis can be carried out. During the analysis the benefits and disadvantages of the package solution are assessed. The third opportunity is  renting  or   paying a fee  for all or some services of an ERP system in the form of ASP, in the Cloud Computing as Software as a Service  or as services some data centres. The financial resources for  small  and micro enterprises  had not made a previous    real option  to procure an ERP system and to employ staff having skill in IT operation. The Open ERP systems may provide an opportunity to solve both the shortage of IT skill and business management. In the past years utilizing the opportunities in IT, there was a proliferation of systems that can be considered as Open ERP systems (Feilmeier 2012). Most recently, the ASP (Application Service Providing)  has been an appropriate, cost-effective solution for micro and small enterprises. The services can be accessed through the Cloud Computing  too. The SaaS  (Software as a Service) and Open ERP solutions seems financially and technically viable  solutions for SMEs in Hungary.    39 Business Systems Research Vol. 4 No. 1 / March 2013   Decision making about the introduction of an ERP solution The question emerges whether what the factors are that lead companies to consider replacing the operational legacy system fully or partially with a new information system. To find answers to the question we have investigated cases covering a wide spectrum and we have collected and highlighted justification from the projects executed to introduce ERP like systems. A Hungarian Ltd. decided to ado pt an ERP (ProFinance™) system, their justification contained three items having grounds in the underdeveloped, legacy information processing system. A company from the Netherlands had an AS/400 based system named TOTICS and had operated for 20 years. The new system is pre-condition  to realize the business strategic plan ; the new IS provides better reliability, higher service level for customers; to increase efficiency and to make more transparent to the business process within the business group; the system should support the business planning and consequently the cost-efficiency and serving the clients; the new IS creates the opportunity for an integrated system. (Tóth , 2008). The subsidiary of a multinational oil company in Hungary used to employ JDE (J.D. Edwards) ERP system. The company decided to eliminate the heterogeneity of systems. The enterprises wanted one integrated solution. Considering the opportunities, the top management of multinational company made the decision for a project called Global SAP, GSAP project (Kulcsár 2008). The Dutch company settled to introduce SAP R/3 as well. In one of our empirical research, we have met the following approach (ELTE 2010, Molnár and Szabó 2011): some business administration functions are centralized at some regional headquarters as e.g. invoice processing and payment. The SAP FI module is procured and customized to be dedicated to this task. Consequently, a business function is covered totally by a single ERP module introduced during the changeover. In the above mentioned cases, the selection phase has been left out . The top management at both companies has made a  strategic decision  choosing an ERP system that is considered as best practice. Causes for Changeover As the before mentioned cases demonstrate, the base for a changeover of an ERP system consists of: (1) the requirement for information processing volume caused by the growth of business, acquiring a larger market share or the intention of it; (2) the necessity for modernization of legacy systems; (3) the requirement for company-wide integration, unification and creating uniformity in information processing. However, there are issues to be considered before deciding on a changeover: 1.   Whether are consultants needed although the system will be operated by the staff of the enterprise? 2.   Whether the costs, the whole project budget can be planned in the selection phase? Some issues: a.   Fix cost at one-time investment, and variable cost at operation time; b.   Infrastructure investment and procurement; c.   Business efficiency and effectiveness of the new IT/IS solution; d.   Can be higher income for the enterprise anticipated? e.   Training and education for the employees and their costs includes maintaining the skill level. f.   Would the inventory management be improved? 3.   Which are the business areas where cost savings can be achieved? Efficiency of production could decrease the costs of salaries and wages? 4.   Whether should a safety deposit be established for financing the unexpected cost growth after ERP implementation? Objectives of ERP selection and practical approaches The difficulties in selection of ERP system did not srcinate from the fact that too few ERP systems are available on the market, in spite of it there are multitude of ERP systems. There are hundred vendors beside the major players in Germany (Grandjean, 2010).    40 Business Systems Research Vol. 4 No. 1 / March 2013  The primary vendor selection could be based on the market position within the specific ERP sector. (Meyer and Gronau, 2011). There are four factors that can be combined variably to represent the market position within competition in a Cartesian chart, namely the competitive advantage, financial soundness, technical knowledge and skill, the stability of business environment. The ERP system vendors can be shown in such a chart. Business Case One of the major objectives during the ERP selection is to mitigate the risks inherent in the selection process. In literature, there are lots of methods and models that have been widely discussed; two of them are outlined below. When management considers several conflicting goals to be achieved, multi-criteria decision making (MCDM)  models enable effective results in the ERP selection process. Subjective decision-making processes related to conflicting business problems with trade-off relationships may produce sub-optimal results. Appropriate ERP strategies must be established on a compromise-based and objective decision-making process among diverse stakeholders (Charnes and Cooper 1961), (Onut, Kara, and Isik, 2009). Analytic Hierarchy Processing (AHP)  is a generally used method for arranging goals, objectives in a hierarchical order. The basic aim of method is to support the decision making in a systematic manner using mathematical and computational procedures. The basic problems with both approaches is that the mathematical theory in background  should be understood by top management and other stakeholders participating in the decision making process (Özdağoğlu and Özdağoğlu 2007). Both MCDM and AHP are discussed in literature, there are some case studies where the application of methods is demonstrated (Wei, Chien and Wang 2005), (Gunasekara, Ngai, and McGaughey 2006). Besides the business and technical criteria and risks there are financial ones  too. The financial perspective is based on cost savings and quantifiable implementation benefits. Evaluation methods include Net-Present-Value, Cost  –  Benefit Analysis, Payback, Return on Investment , etc. To assess the financial parameters one of the analysis models is the ROI (Return on Investment)  that can be applied. (Lindemann, Schmid, and Gronau, 2007). TCO (Total Cost of Ownership) has been used in some cases as well. There is an elaborated method that consists of several hundred questions. The in quiries address the efficiency of information processing taking into account the particularities of various industry sectors and size of enterprises. (Gronau, 2010). Soft Criteria for Selection Besides the service quality and financial criteria, there are lots of other objectives that should be taken into account during the selection process. The compliance  to the requirements of the company is one of the most important criteria. To explore the discrepancies between the existing processes and the processes of potential ERP systems, a gap analysis  should be performed. The new ERP system may fulfil the recent requirements; however the ERP system should be prepared for future demands  (Lotto, 2006). The  stability of information systems means the adaptability  to changes of technology , business processes  and business environment so that anticipated feature of ERP system is certain degree stability. The experiences show that if the set of functions is minimized for several reasons  –   financial, compliance, project timing, resources etc.  –   then later on, the enhancement and evolutionary development to react to the changing environment  may cause extra costs and other operational difficulties in spite of the maximization of a collection of functions (Grandjean 2010). The flexibility  of ERP systems is a  success criterion  within the corporate and SME world (Feuchtinger 2008). The headquarters of multi-national corporations tend to centralize their management, control and governance systems to ensure an integrated and unified business administration. This tendency results in globalized ERP systems . (ELTE 2010), ( Molnár et al. 2011). The concrete implementation is situated in the centralization-decentralization continuum both horizontally
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