ERP solutions for small to medium enterprises

Enterprise Resource Planning Solutions for Small to Medium Enterprises

ERP systems may feel like an albatross to companies that have expensively and painfully installed them. Nonetheless, they constitute a valuable foundation for a wide range of new value-enhancing applications. -- Dorien James and Malcolm L Wolf

Today, the competition for enterprise resource planning (ERP) software packages is fierce and vendors have frantically developed strategies to make their software available to small to medium enterprises (SMEs) (Blumling, Frick & Meehan, 2002). These strategies typically focus around preconfigured solutions, implementation methodologies and hosting options (). This paper provides a discussion and case study analysis concerning the various strategies ERP vendors have developed providing examples of findings from SMEs who utilised these new options, followed by an assessment of what barriers exist to the implementation of ERP systems in SMEs. This study provides an overview of the relevant issues, followed by an analysis of a series of selected case studies of SMEs that have adopted various ERP alternatives, as well as those factors that contributed to their success or failure; a summary of the research will be presented in the conclusion.

Review and Discussion

Background and overview. Today, more and more SMEs are being pressured by an increasingly globalized economy to modify their traditional management styles, both operationally and organizationally, by replacing them with more streamlined and integrated systems that serve to improve the speed and flexibility of their physical and information flows (Jones, 2002), help synchronize demand with supply, and help manage transactions more accurately (Bigras & Gelinas, 2004). There are, however, a wide range of ERP alternatives available to assist in this regard, depending on what size firm is involved (Laursen, 2002). The majority of the ERP software packages are most appropriate for companies with more than $500 million in annual sales and more than 500 employees (Johnston, 2003); however, there are now a number of ERP solutions available on the market and even the main ERP players have solutions that are appropriate for the SME market (Krystkowiak, Bucciarelli & Dubois, 2004; Bielski, 2002). According to the report, "Mid-market Manufacturers and the New Landscape for Enterprise Resource Planning" (2005), "Enterprise resource planning (ERP) systems are streamlining and automating processes that small manufacturers would have found cumbersome to carry out on a global basis. This process improvement, in turn, allows these manufacturers to extend their geographic reach at lower costs" (p. 3). Therefore, ERP packages provide SME managers with more efficient and effective ways to interconnect geographically dispersed stakeholders and integrate existing information and communication technologies (Blenkhorn & Fleisher, 2001).

Strategies to make the ERP software solutions available to SMEs. Among the strategies commonly used by ERP vendors are preconfigured solutions, implementation methodologies and hosting options. Because SMEs typically use ERP software to facilitate the exchange of information throughout their organizations, ERP vendors usually sell their applications in suites that contain various modules such as audit trail, payroll, purchasing, point of sale, manufacturing, inventory, job costing and bill of materials (Piturro, 1999). The competition in the ERP industry is also fierce, with SAP, the ERP market leader, and Oracle, the number-two company, consistently extending their product ranges to compete against emerging products from smaller competitors in newly identified functional areas (James & Wolf, 2000). In this regard, SMEs can elect to choose a single vendor for all of their IT needs, or they can elect to choose from the best ERP solutions available for each of their business functions; these seemingly disparate units, though, can now be integrated through the use of so-called "middleware" that allows an SME to upgrade its ERP package as its requirements change (James & Wolf, 2000). While preconfigured, a number of ERP applications are being developed for specific industries that allow for easier customization and a wider range of features (Banham, 2000; Tozzi, 2004; Ashbaugh & Miranda, 2002).

Barriers to ERP System Implementation in SMEs. According to Piturro, "When it works well, ERP can speed up business processes, reduce costs, increase selling opportunities, improve quality and customer satisfaction and measure results continuously. When it doesn't work well, it can be a very expensive way to gum up the works" (p. 41). In fact, many SMEs have reported disappointing (Chia & Ling, 2003) or even disastrous results from their ERP initiatives (Bhattacharjee & Moreno, 2003). Therefore, recognizing organizational constraints to the successful implementation of ERPs by SMEs is critical. According to Gable and Stewart (1999), there are four primary dimensions of SMEs that may represent potential constraints to the successful implementation of an ERP system; these are:

1. Organizational. This constraint relates to the fact that most SMEs have a simple and highly centralized structure; are "resource poor" terms of their human, financial and material assets; and are confronted with greater environmental uncertainty as a result of having a lower measure of control over their extraorganizational situations. Gable and Stewart cite the example of most SMEs having less influence over computer vendors or consultants and thus they may receive a relatively lower level of service; further, SMEs can be situated in more remote areas, where service delays are longer and external computing resources less available (Gable & Stewart, 1999).

2. Decisional. This dimension of SMEs relates to their strategic decision cycle or timeframe; in the case of SMEs, this dimension is typically short-term, with an orientation that tends to react to changes in the environment rather than anticipate and address them; decisional aspects of SMEs are also less formal than their larger counterparts, and they tend to employ fewer formal management techniques such as capital budgeting, project management, inventory control and financial analysis. The authors add that past studies indicate that the decision-making process in SMEs is more intuitive and judgmental without relying on formal information and decision models (Gable & Stewart, 1999).

3. Psycho-sociological. Owner-managers of SMEs play a dominant role in terms of strategy, decisionmaking, and the psychological climate within their organization; SMEs are also less likely to share information and delegate decision-making authority. As a result, SMEs will tend to have fewer individuals, other than the CEO, who will have the requisite authority and access to information to justify the implementation on an ERP package (Gable & Stewart, 1999).

4. Information systems. The majority of SME applications continue to relate to transaction processing applications, purchased as off-the-shelf software packages that are then customizable to a client's specific needs. In most SMEs, the information systems function is usually in an early stage of development; subordinated to the accounting function; lacks the requisite managerial expertise to plan, organize and control the use of information resources of the SME; and, at a relatively low level of technical systems development sophistication (Gable & Stewart, 1999). In addition, existing information systems are typically underused by SME managers (Gable & Stewart, 1999).

Gable and Stewart conclude that, "The four dimensions, and their related underlying properties, represent unique characteristics of SMEs, that may have significant influence on the ERP implementation lifecycle" (p. 779). Clearly then, SMEs are faced with some profound challenges as they seek first to determine whether an ERP is an appropriate solution for their unique situation, and then to decide which vendor is the best suited for their purposes. The following case studies are illustrative of how these issues can affect the successful outcome of an ERP initiative by SMEs.

Prestagaz, Luxembourg. A case study by Krystkowiak, Bucciarelli and Dubois (2004) focused on Prestagaz, a Luxembourg-based SME with 100 employees specializing in the reconditioning of gas bottles. According to these authors, "The main strategic goal for Prestagaz was to avoid multiple and redundant data input on a set of heterogenous machines, and thereby to have a single, central information system. Thus for this SME, investment in ERP acquisition is the challenge to be seriously considered" (p. 1). To determine which vendor and ERP application best suited their needs, the company used a methodological approach and a new tool called "OPAL"; this approach and the OPAL tool were used to help develop appropriate specifications and standardized questions, thereby facilitating a comparison of responses from vendors (Krystkowiak et al., 2004).

The OPAL software tool provides companies with the ability to take advantage of knowledge captured during the procurement processes that are performed in an equivalent business or application area; Figure 1 below shows how the software allows SMEs to develop lists of priorities of business processes and then assign a relative weight to these processes as they relate to their business goals. In reality, this process is not as time-consuming or as daunting as it first appears. The authors point out that it is possible to recycle requirements previously collected during other projects concerning ERP system selection. "Those reusable requirements are organized in terms of modules," they advise, "each of them being associated with a main functionality of an ERP" (p. 3).

Figure 1. Capture of the strategic objectives and business processes.

Source: Krystkowiak et al., 2004 p. 2.

The OPAL applications make such recycling easy; Figure 2 below illustrates a typical OPAL screen that is linked with the opening a reusable model on the left and then the reuse of new requirements by transferring them into the project on the right. The SME can then refine the description of the requirements and the formulation of the company's questions to the vendors. Each requirement is ranked according to the risks and opportunities identified by each user group and an aggregate of the data allows the user groups opinions to be consolidated (Krystkowiak et al., 2004).

Finally, Figure 3 below is an OPAL screen that shows how the SME weights each requirement by each user group. According to Krystkowiak and his colleagues, "A synthetic weighting, made by management, is then performed, and comments can clarify the reasons for a management decision. This weighting will enable the creation of the future selection grid of the offers by calculating the importance of each requirement in the score of the future suppliers" (p. 4).

Figure 2. Reusing requirements.

Source: Krystkowiak et al., 2004 p. 3.

Figure 3. Weighting requirements.

Source: Krystkowiak et al., 2004 p. 3.

By using the OPAL tool and the recommendations provided by consultants of a Luxembourg government agency, Prestagaz developed a highly effective call for tenders that resulted in their receiving a large number of responses from potential vendors; fortunately, the OPAL tool even allows for a consolidation and comparison of these responses to determine which vendor and ERP best matches the company's unique requirements based on the input from all of the affected stakeholder. In addition, the OPAL tool has features that allow SMEs to track negotiations with ERP vendors, and synthesize these results for management decision making (Krystkowiak et al., 2004). The results of this initiative were impressive and were found to be far superior than a spreadsheet approach; furthermore, Prestagaz selected the ERP tool that best suited to its specific business requirements.

CMW, United Kingdom. In 2003, as part of the National Action Learning Programme (NALP), one company called "CMW" (the company's name has been disguised), participated in an ERP-based project designed to improve the competitiveness of UK-based enterprises. CMW was founded in 1986, and grew over the years to become one of the largest independent manufacturers in its industry in Europe. At the time, the company's management recognised that its existing approach to practice and performance were not competitive, and despite having the requisite talent and expertise to succeed in its industry, there were no immediate solutions forthcoming from the industry itself (Coghlan & Coughlan, 2003).

In collaboration with NALP, this company examined its operations using an action research approach and launched an ambitious and fundamental overhaul of its organizational structure. The company subsequently adopted modern information management alternatives such as ERP and MIS networks (unidentified in the case study), expanded its use of the electronic transfer of information that increased the quantity of networked information, as well as basic communication system improvements such as e-mail and voice mail (Coghlan & Coughlan, 2003). The results of these initiatives were not immediate but they were impressive; the owner-directors concluded that CMW had finally started moving towards "world class" levels of operations practice that would result in superior performance (Coghlan & Coughlan, 2003).

Northern Digital, Waterloo, Ontario. A case study by Managing Automation (2005) of this company shows that it was founded in 1981 and is headquartered in Waterloo Ontario,

Canada. Today, Northern Digital Inc. (NDI) is a major Canadian supplier of 3D/6D measurement products used in industries such as image guided surgery, robotics, aeronautics and biomechanics; NDI employs 90 workers and has over $20 million in annual revenues (Northern Digital, 2005). The case study reports that NDI's previous information system was constraining, rather than facilitating the accomplishment of its organizational goals; the company was not without its strengths, though. The company had received numerous awards for quality and was ISO9001 registered, but customer service was suffering and order backlogs had reached unacceptable levels (Northern Digital, 2005).

The case study reports that following an analysis of which product and vendor would best suit their needs, NDI selected Intuitive ERP ™ from Intuitive Manufacturing Systems based on factors that directly supported their organizational goals. According to the case study, "Intuitive ERP provided a level of system functionality that could immediately improve inventory management and the expandability and flexibility to support NDI's growth. Equally important was the system's level of ease of implementation and ease of use" (p. 1). Following its implementation of the Intuitive ERP package, NDI experienced continued success in improving inventory management and increasing revenue; inventory turn rates have doubled (a major corporate goal), and are expected to improve even more in the future as the company becomes accustomed to using the new system. To date, NDI's revenues have increased from $10 million to over $20 million with little increase in inventory value; furthermore, the company reduced its order cycle time for their flagship product from four months to four weeks, almost an 80% improvement (Northern Digital, 2005).

Red Gold, Orestes, Indiana. This SME is a large, privately held agricultural processing company employing 960 employees throughout the state. Today, the company supplies grocery stores with private-label and brand-name tomatoes using an ERP system purchased in 2000 from I-many, a Portland, Maine-based software provider. According to Laursen, the I-many ERP system allowed Red Gold to improve its tracking of client deductions and cash discounts; furthermore, by linking directly with the terms of the contract itself, the ERP accumulates documentation in an orderly fashion "so that if the company wants to dispute a discount, it has the evidence to do so," a company vice president of finance for the company noted (Laursen, 2002 p. 58).

The SME's former paper-based system was only partially successful in identifying such invalid cash deductions and would only receive its money back infrequently because it was difficult to synthesize the documentation. Following ERP implementation though, Red Gold was able to trace documentation to original invoices in 97% of these cases; consequently, these efficiencies meant that the software paid for itself within a year of purchase (Laursen, 2002). This vendor was selected by Red Gold based on its experience in the food industry and the procedures for tracking and resolving discount and deduction issues offered by the ERP closely matched the SME's requirements. While I-many was cited for its excellent customer support as contributing to the success of this project, the author adds that Red Gold had significant experience in implementing other companywide automated systems that also contributed to its success (Laursen, 2002).

Four Chinese Construction SMEs. This case study examined four SMEs (an architecture-engineering consultancy firm, a property developer and two contractors) following their selection and implementation of ERP packages. The authors note that besides having the choice of ERP applications and vendors, SMEs can also implement ERPs along a continuum of progressive steps, ranging from technologically enabled processes to a complete reengineering of their business process (known as the "clean slate" approach) (Chia & Ling, 2003). According to these researchers: In clean slate re-engineering, the design of the ERP system starts from scratch. First, firms decide how they want to re-engineer their business processes. An ERP software component is then designed to fit the business operations. This approach is relatively more costly than technology enabled approach, but it could meet a company's needs better. Moreover, the firms' best practices could be incorporated into the ERP software. (p. 324). This approach is recommended for SMEs that provide unique value-adding processes to their product or service, as well as those who enjoy substantial resources but less flexibility to modify their existing processes to fit the ERP software requirements (Chia & Ling, 2003).

To identify their constraints and successes in implementing their respective ERP packages, the researchers interviewed senior managers and project leaders on these ERP initiatives and synthesized the following results from the four SMEs:

SME 1. The first company developed its ERP package in-house and elected a clean slate approach because extensive customization of off-the-shelf software would be required to meet its unique business processes; in addition, the SME enjoyed sufficient resources, expertise and the time required o develop the application. As a result, this ERP package was specifically tailored for SME 1 and was therefore exactly suited its needs. This ERP package was used as a 'virtual manager' that assumed responsibility for the document management system of the SME; in this capacity, it oversaw the entire process chain and carried out activities such as filing, tracking of man-hours used, deadlines for reports and drawings and numerous other activities. The SME's CEO described these activities as being repetitive but essential tasks tied to the company's success because the SME is a service-oriented company and its "product" is actually the engineers' expertise. The ERP allowed these engineers to spend more billable time with customers. As a result, "Productivity of the firm increased and this amounted to cost benefits and competitive advantage. The system also incorporated the company's best practices" (Chia & Ling, 2003 p. 325).