purpose of this article is to build and validate the necessity for small to
medium-sized enterprises (SMEs) in order to adopt an enterprise resource
planning (ERP). Which would be based on the SME’s environmental, organizational
culture, and ability to adopt technological changes.
that location are excellent tools like Six Sigma Quality, Factory Automation,
Design for Manufacturability etc. with tremendous potential. But, none of them
will ever give their full potential unless they are matched with effective
forecasting, planning, and scheduling processes. Enterprise Resource Planning
(ERP) is the solution, which is a direct outgrowth and extension of
Manufacturing Resource Planning.”
Towards the close of last century, it was out of
coercion and not by simple choice that large industrial houses went in front on
the unchartered and an expansive path of ERP adoption. The un-standard,
non-synchronized data, misaligned and broken information flow coupled with
non-refined business processes were becoming a major hinderance in their growth
possibility became a reality only with the coming up of ERP Solutions from
giants like SAP, Oracle, Microsoft and many more, duly supported by launching
of robust servers and dependable networks. But over the last decade, with
technology becoming simpler and easily available, with the coming up of ready-to-use
off-the-shelf ERP packages with shortened implementation phase, the emergence
of cloud computing (with pay as you use option), requiring minimum in-house
skill set, the possibility to become leaner and efficient organization, now
looks close to reality for SMEs.”
development cycles, cut throat domestic and worldwide competition, economic
downturns, rapidly shifting customer demands and volatile financial markets
have increased the pressure on SMEs to come up with effective and competitive
capabilities to endure and win. Enterprise resource planning (ERP) is often
considered as one of the solutions for their survival.”
“Up to mid-1990s, the SMEs sector in India had
operated under much-protected economic regime characterized by limited
competition and highly regulated business environment. This business atmosphere
had resulted in a limited focus on process efficiencies, centralized control
structures, highly formalized business settings and lack of professional business
practices. However, following the economic liberalization and opening up of the
economy to foreign multi-national companies, Indian SMEs have to adopt modern
business practices and strategies, which in turn can provide them a cutting
edge over its competitors.”
“ERP software integrates different functional spheres
in an organization – by linking the entire supply chain thus aiming at adapting
best industry practices, for providing the right product at the right place at
the right time therefore leading to lowest cost. ERP has the ability, once
implemented, to integrate all major activities across the organizational
departments using an integrated software solution. In effect, this can greatly
assist the organization to carry out its operations in more effective and
efficient ways and allow the workforce to interact and collaborate in an
information-enabled environment. Using ERP, large manufacturing firms are
linking up with their suppliers and
located in any part of the world. Employees are sharing information with each
other on a real-time basis. ERP can expedite responses to customers’ orders and
inquiries, reduce inventory, shorten production cycle time, improve quality,
raise the efficiency of delivery of products and services and strengthen
in-company coordination. After concentrating on the large-scale firms, the ERP
vendors are now targeting on SMEs. In recent times, many multinational
companies have limited their operations to partnering only those midsize
companies that are using compatible ERP software. Hence, it becomes all
important for many midsize companies to adapt their business model and adopt
ERP software that is compatible with the largest enterprises with which they
trade. However, ERP implementation in SME and large organization cannot be
viewed at par as there is a vast difference in characteristics between two. In SMEs,
there are scarcity of resources in terms of management and manpower, R&D,
finance, marketing, etc. SMEs deal with small number of customers and operating
in limited markets. They have flat and flexible structure.”
There are many factors that can motivate the SME’s to adopt
an ERP system.
The factors that
influence the decision to adopt advanced manufacturing technology in SMEs,
Ariss et al. (200) proposed the following classification:
related to the product/market (improvement of product quality, improvement in
reasons (cash flow, availability of financing, government programs of financial
and organizational reasons (strategic orientation with regard to technology,
exposure of management to technology, relations between management and
employees, competence of employees, increase in productivity)
related to the sector of activity (competitiveness in terms of cost,
The question of
the motives for ERP system adoption has been taken up in different studies
(Oliver and Romm, 2000; Ross, 1999), with some dealing specifically with SMEs
(Dolmetsch et al., 1998; Oliver and Romm, 1999; Gable and Stewart, 1999).
Oliver and Romm (2000) divide the factors that determine the investment made in
seeking out information with a view to an eventual ERP system adoption into
need to improve the performance of ongoing operations.
need to integrate data and systems.
need to avoid a competitive disadvantage or to avoid that a business risk
classifies the reasons for ERP system adoption into three categories:
(improvement of processes, data visibility).
(cost reduction, strategic decision making, adaptability to client requirements).
demonstrates the overlapping character of these reasons: the new integrated
enterprise systems infrastructure makes it possible to acquire new capabilities,
which in turn are supposed to allow the business to generate improved results.
For Dolmetsch et al. (1998), the reasons for using standard integrated software
packages can be traced back to corporate strategy, business processes, or IS applications.
In a study having to do with medium-sized non-profit organizations, Oliver and
Romm (1999) propose that these organizations adopt ERP systems for gains in
efficiency or for technical, economic, or strategic reasons. Caldas and Wood
(1999) call for a broadened perspective to comprehend the ERP phenomenon,
thereby removing it from the technological reductionism and
have tended to characterize it previously. Hence, they propose three groups of
factors that, either alone or in interaction in a complex dynamic process,
influence the adoption, the implementation, and the evaluation of ERP systems
in an organization:
factors include the actual requirements, problems, or opportunities
thatorganizations face and for which ERP systems are an adequate response.
Institutional factors refer to all external forces present in the
organizational environment that apply pressure for the adoption of ERP systems,
which are often presented as a “panacea”. Political factors reflect the
interests of the various power groups within the organization.
A number of
studies have in fact successfully used Tornatsky and Fleischer’s (1993)
technology-organization-environment (TOE) framework to explain the adoption and
assimilation of information technology, emphasizing three groups of
determinants or predictors:
of the environmental context such as external pressures from the firm’s
of the organizational context such as the firm’s structure and resources.
of the technological context, including the computer-integrated manufacturing
technologies already implemented by the firm.
The need to
optimize the supply chain is one of the factors that lead to the adoption of an
ERP system: large manufacturing companies exert pressure on their suppliers,
mainly SMEs, so that they will meet world standards in terms of cost,
efficiency, and quality; this very often obliges these SMEs to restructure
their processes, and in so doing they generally need an ERP system capable of
real-time sharing of detailed information with their partners in the value
The effects of
the environmental context as follows:
· .SMEs operating
in a price-sensitive market will be more predisposed to adopt an ERP system.
· SMEs operating
in a very dynamic sector or in a high-growth market will be more predisposed to
adopt an ERP system.
· Close logistical
links between SMEs and their business partners (partnership-network) would
necessitate the integration of information in the value chain, thus increasing
their motivation to adopt an ERP system.
· Membership or
affiliation of SMEs in a network of business partners will motivate them to
adopt an ERP system.
The effects of the
organizational context are as follows:
SMEs having very idiosyncratic production
processes will be less predisposed to adopt an ERP system.
SMEs in a situation of (human,
technical, and financial) resource scarcity will be less predisposed to adopt
an ERP system.
SMEs with greater flexibility will be
less predisposed to adopt an ERP system.
· Larger, more
decentralized SMEs will be more predisposed to adopt of an ERP system.
Greater formalization will predispose
SMEs to adopt an ERP system.
The effects of the technological context are as
· SMEs confronted with
the obsolescence (inefficiency, inflexibility, disintegration) of their
“legacy” manufacturing information systems will be more predisposed to adopt an
· SMEs that have
implemented and assimilated more advanced and integrated manufacturing technologies
and applications such as CAD/CAM, FMS, and MRP-II will be more predisposed to
adopt an ERP system.
Some of the
specific issues of ERP implementations in SMEs are given below.
about ERP system among SMEs
responses regarding the “information about the ERP system” revealed that though
the ERP is evolved from the basic idea of MRP and manufacturing resource
planning, most of the companies are not using the production planning,
maintenance and quality management modules which are the key functions in
manufacturing. The most common modules and because of which ERP became so
popular in industrial sector is inventory management, purchasing and financial
force to implement ERP system
are different advanced manufacturing technologies adopted by different
companies to improve the productivity of their organizations. ERP
implementation is one of the tools, but the reasons to implement it are
different for different companies. The information collected is shown in Figure
4. Of the companies, 58 per cent have implemented the ERP “to integrate the
existing information system”. The reason was the opposition from the employees
who wanted to continue with the existing system. The second priority was given
to replace “weak existing information system”. It is a general presumption of
the SMEs that ERP is not for them and it is affordable only to large
enterprises and hence some sort of information system software developed by
local software companies was purchased by them. The back end of it was either
in MS access format or MS Excel format. “Replacement of legacy system” and
“complementing the legacy system” come, respectively, as next priorities.
evaluate the performance of the SMEs after ERP implementation, its benefits
were measured. As one-third of the ERP implementation failed in large companies
or predetermined goals are not achieved, whether SMEs are benefited by the ERP
implementation and in which areas benefits are more compared to others. It was
identified that most of the SMEs view that “reduced inventory” has been found
as themost beneficial factor of ERP .The “improved customer service”, “reduced
planning cycle time” and “decreased lead time”, “improved communication” are
the benefits in next priority with most of the organizations. The “improved
competitive positions”, “increased throughput”, “reduced error in ordering” and
“reduced cost” are also the areas where organizations found benefits to certain
reduction in cost can be combined effect of reducing the manpower cost,
decreased lead time, reduction in inventory, etc. Though actually man power is
not reduced but keeping the same manpower, the turnover of the company is
increased resulting in saving the manpower cost. By calculating the
proportional increase in manpower cost with the increase in turnover, one can
find out the reduction in cost due to ERP. Besides the tangible benefits, there
are numerous intangible benefits also.
decision making”, because of availability of information in real time, is most
beneficial among others. Earlier, decision making was the authority of the
senior most executive with more experience but due to ERP system, the decision
making has become simple. “Streamlining the business processes” and “reduced
information delay” are the other benefits in the next priority.
context of the possibility to provide for and achieve a meaningful return on
investment (ROI) for ERP projects. SMEs fairly believe that there were more
intangible benefits from ERP; whereas, very few SMEs fairly believe that there
were more “tangible benefits” from ERP.SMEs think that ROI can be computed but
is difficult to quantify the benefits of it. Some SMEs believe ROI cannot be
computed as intangible benefits are more as compared to tangible benefits and
hence ROI will be less in spite of the utility of ERP beyond doubt.
of ERP Success
top management support” has been found as major facilitator and it was agreed
to by most organizations. “Users’ involvement and participation”, “good
understanding of the concept of ERP”, “the strong and meaningful training
programs”, were the other ERP facilitators, which have been significantly
agreed by the organizations. The “strong MIS department”, “good implementation
partner” and “efficient change management” have also been found as the reasons
of ERP success, but in next priorities.
of ERP failure
that have implemented ERP doesn’t believe it a failure. However, few of them
have not achieved the predetermined objectives. There are different reasons,
which contribute to it. The reasons cited by them are “poor quality of ERP team
members” was the major inhibitors. The factor, viz. “poor training program” and
“wrong ERP software selection” are the other inhibitors in next sequence
Almost all SMEs
have reported that they are benefited by the ERP implementation in reducing
inventory, improved customer service, reduced planning cycle time and improved
communication in the order of priority. But still, SMEs are not extracting the
benefits from ERP to the fullest extent. There are more intangible benefits of
ERP and hence implementation should not be related with ROI. The top management
support, user involvement and participation, good understanding of the concept
of ERP are major contributors of ERP success. In the present era of
globalization, it is obvious that the survival of the SMEs will be determined and
will have to be addressed extensively. Accessibility to the right kind of
information at right time is the first and foremost by their ability to
manufacture/supply more at competitive cost, in less delivery time, with
minimum defects, using fewer resources. In order to face this challenge, the
issue of ERP is the need of the hour and hence the need of ERP in SMEs is
beyond doubt. The fear of SMEs about its failure histories should be tackled