«Enterprise Resource Planning (ERP) system is a
strategic tool that helps a company to gain competitive advantage by
integrating business processes and optimising resources available» (Zeng,
Chiang & Yen, 2003:115).
The different ERP software packages are not always suitable
for every type of business, necessitating a proper strategic evaluation of the
system before any adoption and/or during implementation to assess its
competitiveness impact with regard to the organisation's objectives and its
influence on the value chain. In this regard, a technical and strategic
planning model tool such as value chains may be applied in order to facilitate
the evaluation for selecting and adopting ERP software, which the multinational
enterprise (MNE) can integrate in its value chain effectively and
efficiently.
The aim of this chapter is to describe the background of this
study relating to an ERP system, the objectives and the research design and
methodology used. The research problem and hypotheses are given, the literature
review on IT and strategy management, the value chain and ERP system is
described briefly, and the demarcation of the chapters are also addressed in
this chapter.
1.1.1 Multinational enterprises (MNEs)
An MNE is described by economists as any company that
«own controls and manages income generating assets in more than one
country» (Dunning, 1992:34). Technically, most MNEs have became e-MNEs
with facilities in a number of countries and achieve their management through
cyberspace. Thus, Zekos (2005:53) defines an MNE as a virtual enterprise that
has production facilities in various countries concerning tangible goods and an
advanced network dealing with intangible goods. Its processes and transactions
are achieved via cyberspace by people or some actions made by electronic agents
such as electronic contracts and automated sales.
Nowadays, MNEs are investing in ERP systems to gain a
competitive advantage because of trends
of liberalisation and globalisation
where integrating both customers and suppliers with the entire
system
becomes critical. Furthermore, there is a need to meet the organisation's
international
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management needs because of the system performance, which is
designed to standardise, streamline and facilitate the integration of the
information and processes to flow across functional, product and customer lines
over national boundaries (Madapusi & D'souza, 2005:7). In addition, through
the recent development of ERP and the benefits associated with it, MNEs are
seeking ways of improving their overall performance. In fact, in a study
conducted by Blasis and Gunson (2002:17), Caldwell and Stein assert that ERP
systems provide the foundation for the add-ons for MNEs. The real payback is in
the synergy of people, processes and technology once the system is stable.
Below are examples of international MNEs that have unlocked economic value by
aligning the ERP with their strategies as investigated by Clemons and Simons,
Davenport and Kay (in Madapusi & D'souza, 2005:7).
· Texas Instruments Company
ERP systems at Texas Instruments Company in the USA are used
worldwide by more than 13 000 users and handle well over 45 000 products and
120 000 orders per month. ERP implementation has helped the organisation
standardise its worldwide business processes, leverage its e-commerce supply
chain capabilities and achieve a system response time of less than three
seconds 90% of the time, according to Sarkis and Sundarraj (in Madapusi &
D'souza, 2005:7).
· Delphi Automotive Systems Europe
Delphi Automotive Systems Europe has used its ERP systems
across eight European countries. The organisation has developed a quantifiable
business model, defined its best practices and structured its ERP
implementation to achieve its business goals. As a result Delphi's ERP system
integration has enabled its 69 geographically dispersed plants to synchronise
their operations and fulfil complex customer orders, as highlighted by Jeffery
and Morrisson (in Madapusi & D'souza, 2005:8).
In the South African context, MNEs are upgrading and integrating
their current ERP systems.
· Unilever South Africa
Unilever Foods succeeded in streamlining their production
chain with Infor Advanced Scheduling
from Apply IT. A Unilever company that
refines oil for the production of margarine such as Rama,
Flora and Stork,
together with Apply IT, has implemented ERP software successfully by
streaming
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its production chain, from refinement to packing, while
avoiding bottlenecks and improving customer service. Unilever has also
successfully integrated its supply chain project, slashing Unilever's latency
from 36 hours to mere minutes. The second phase of its implementation of
Agilisys Advanced Scheduling at Unilever Best Foods Robertson in Boksburg
allows Unilever to synchronise supply chain planning between its core SAP R/3
ERP, the oil refinery control system and Info (Unilever SA base case study:
available online).
· Multichoice Africa Company
Multichoice Africa Company is a provider of a full array of
content and pay-media services over a variety of electronic platforms, with the
focus on the Internet and interactive television platform services and related
technologies (Multichoice Africa base study: available online). The company's
operations manager acknowledged in an interview with Financial Mail
the limitation of achieving the kind of customer relationship management
services that some call centres boast. From this interview it was clear that
the ideal would be a system that allows the operator to know who is calling,
gather the caller's history and any previous service issues, through a
programme that appears on the computer screen as soon as the call comes in
(Financial Mail, 2002:1). The real problems facing Multichoice Africa
(MBA group assignment study report: 2002:12) fell under its value chain system,
in which the different process systems were not integrated and had no interface
with each other. The main problem was the duplication in the kind of
data/information in all the different systems. The company is, however, in the
process of re-engineering itself to establish a system that will integrate all
the systems to enhance its business processes.
However, this is contrary to the running performance and the
successful project implementation of ERP in MNEs such Texas Instrument and
Delphi Automobile. Others see ERP systems as a waste or a burdensome system.
Below is a summary of the case study of Hershey (Laudon & Laudon,
2002:363), where ERP system implementation projects have snarled their internal
processes.
· Hershey
Hershey's information systems management set a goal to move
to an ERP system using software from SAP of Walldorf, Germany. SAP was to be
complemented with software from Manugistics Group Inc. of Rockville, Maryland.
Manugistics would support production forecasting and scheduling as well as
transportation management. In addition the company decided to install
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software from Siebel Systems Inc. of San Mateo, California.
Siebel's software would aid Hershey in managing customer relations and in
tracking the effectiveness of its marketing activities. Management believed
that the project would help Hershey better execute its business strategy of
emphasising its core mass-market sweets business. Problems arose for Hershey
when the cutover strategy did not work, because serious problems emerged
immediately. It indicated that Hershey's employees were having trouble entering
new orders on the system. Once the system was up, the company stated that order
details were not being transmitted properly to the warehouses where they could
be filled. As soon as the admission of problems was announced, questions arose
about the causes of those problems. The general manager verified that
consultants were at Hershey sites to help resolve the problems. It was made
clear that "there are really no software issues per se", as it was clarified
that these consultants "are just making sure they [Hershey employees] are using
the business processes [built into the software] correctly". Manugistics also
said it was working with Hershey on "business process improvements". Major
changes were noted in the way Hershey employees were doing their jobs, which
implied the need for more and different training than Hershey's staff had
originally received. In early February 2000 Hershey reported an 11% decline in
sales and profits for its fourth quarter in 1999. Although Hershey has released
very little information on the troubled implementation, observers continue to
speculate on the key question: what went wrong? Some point to pushing forward
the target data - trying to accomplish too much in the allotted time frame.
Others believe that inadequate time and attention were allocated to testing
prior to Hershey's new systems going live in July. Still other analysts point
to the use of the direct cutover method. Finally, some analysts point their
finger at training. Connecticut says that only 10 to 15% of ERP implementations
go smoothly. Some observers believe that the lack of education on the why of
the system and how the many pieces of the full system fit together is possibly
the reason that order entry difficulties created warehouse problems.
Through the analyses of the above case studies, the researcher
noticed that:
· MNEs are re-engineering themselves due to technical
problems, international competitive pressure and the need to improve systems to
meet company growth.
· The adoption of ERP in the company as a strategic IT
system tool has led to organisations experiencing an explosion of demand,
operation efficiency and the feeding (integration) of
4
third-party business partners into the value chain to form
extended enterprises.
· The implementation of an ERP system needs to be
managed because of the far-reaching changes that the systems bring to the
organisations. Therefore the redesigning of a business requires careful
analysis and planning. Keen, Peter and Mourton (1978:39) stipulate that when
systems are used to strengthen the wrong business models or business processes,
the organisation could become more inefficient at doing what it should not to
do and become vulnerable to competitors who may have discovered the right
business process model. Keen et al., (1978:39) further emphasise that the
organisation must understand which business processes need improvement before
launching into process redesign which could be costly to the enterprise as a
whole. This is clearly what the researcher noticed in the case study of
Hershey.
· The failure of the ERP system implementation project
in Hershey is associated with the business process redesign. Users of the new
system processes were not given the proper training and the organisation's
management did not consider ERP as a strategic IT tool during the adoption and
implementation of the system project. Proper evaluation and analysis are
vital.
1.1.2 Value chain integration and information system
(IS)
According to Forrester research (in Balls, Dunleavy, Grant,
Hurley & Hartley, 2000:84), value chain integration is where most
organisations are pursuing performance improvement opportunities today.
Forrester estimated that by 2001, over 70% of companies would be sharing
demand, inventory and order-status information with their trading partners and
distribution channels.
An organisation that tries to integrate within an extended
value chain before implementing its own ERP will find the benefits of value
chain integration elusive. Without ERP, e-business may do nothing more than
create both upstream and downstream problems at Internet speed. These problems
result from the lack of reliable, accurate and timely information that trading
partners require, as well as from the inability to make intelligent decisions
and take effective action on the newly available information coming into the
organisation from suppliers and customers (Balls et al., 2000:93). Moreover, a
company's value chain is behind its web page. Broadly speaking, a company's
simple value chain consists of product planning, procurement, manufacturing,
order fulfilment, service and support. Regardless of whether an organisation
produces and delivers a physical product or service, it has a value chain
(Balls et al., 2000:81). Sarkis and Sundarraj
5
(2000:205) assert that the value chain, also known as a
supply chain or value-adding process, comprises a number of functions and
processes within the organisation. Laudon and Laudon (2002:86) define a value
chain as a model that highlights the primary or support activities that add a
margin of value to an organisation's products or services. The integration
occurs between the primary activities in each value chain and is enabled by the
support activities. Therefore the benefits derived from these key parts of the
activities integrated in the value chain system allow virtual organisations to
become more agile and gain a competitive advantage in order to enhance the core
processes of integrated business seen as a flow of the information and
activities from customer interest to customer fulfilment (McAdam &
McCormack, 2001:117-124).
However, a vertically integrated organisation extends its
control of the value chain as far back as possible, quite literally to "own"
the raw materials that are used in its products. For example, some large oil
organisations control the product from well head to pump handle. In other
cases, organisations may choose to focus on a core competency or set of
competencies and let others manage and run various parts of the industry value
chain. Reasons for choosing one business approach over another vary from
industry to industry, and organisation to organisation, based on each
organisation's particular strategy. What is common to all industries is the
power of Web-based technologies to change the status quo significantly by
providing a mechanism that further integrates the value chain. Therefore, a
highly integrated value chain creates greater value for the end-customer by
delivering products and services more efficiently and effectively to enhance
the cores of value chain integration, which are visibility, access and
timeliness. Within the industry value chain, the group of organisations that
carry out each step in creating and delivering products is called the supply
chain (Balls et al., 2000:82-4). An integrated IT set could not only eliminate
many redundant processes, but also provide opportunities for co-ordinating and
integrating many disparate processes (Bhatt, 2000:1353). Wyse and Higfins (in
Bhatt, 2000:1333) define IS integration as the extent to which data and
applications through different communication networks could be shared and
accessed for organisational use.
1.1.3 Strategy and value chain model
Walters and Lancaster (1999:648) describe strategy as the art of
positioning a company in the right place on the value chain for the right
business, the right products and market segments, and the right
6
value-adding activities. The value chain in the old view of
an organisation's management was seen as a backbone of delivering processes
from raw material to the end of product. Nowadays, the value chain's role has
expanded, becoming an integral component in the strategy process for the
evaluation of the company's core competence and its fit in the overall creation
of value. Thus, described strategically, the value chain model is an analytical
tool that facilitates strategy (Walters & Lancaster, 1999:648). The value
chain model is an ideal vehicle, particularly when it is used to identify an
organisation's strengths and weaknesses, and to compare these with the
opportunities and threats posed by its external environment (i.e. competitors,
technology, social change and the legal environment). Walters and Lancaster
(1999:644) assert that the value chain model can be used to evaluate
«relative position», identify an organisation's distinctive
competence(s) and directions for developing competitive advantage, and in fact,
to analyse strategically the impact of IT, particularly the ERP system.
Therefore a technical strategic planning model becomes an important tool in
determining how companies use IT. Corboy (2002:1) states that there are many
models available that can be used to analyse how IT can be used strategically.
These models can be used to assess the impact of the IS on the organisation's
individual value chain, and how the integration between the value systems of
the various contributors or activities could be strengthened, as well as the
cost/value of product, user, manufacturer and customer (Walters &
Lancaster, 1999:644).
The other strategic tools mentioned by Bakehouse and Doyle
(2002:3) are the SWOT analysis and PEST, Nolan's stage hypothesis, Chekland's
soft systems methodology, McFarlan's information system strategic grid, the
three-stage change process (unfreeze, change, re-freeze), Earl's system audit
grid and three-leg analysis, McFarlan's application portfolio and Peppard's
adaptation of it, Parson's six information system strategies and Zuboff's
automate, informant, transformate model. In addition to these are Porter's five
competitive forces theory and the generic strategies approach.
The aim of an ERP system is to improve the co-operation and
interaction between all the departments in the organisation (Bernroider &
Tang, 2003:4). The fundamental purpose of this study is to analyse the
compatibility of Axapta software with a value chain system through a technical,
strategic planning model (value chain approach) in addition to the supply chain
factors for ERP software evaluation. The aim is to assess Axapta's requirement
status as an ERP system software, and its attributes, configuration and
architecture, enabling integration of the discrete systems of the MNE's value
chain in order to gain competitive advantage. The benefits derived from
7
an Axapta implementation project will facilitate the use and
integration of the information process to flow in the MNE's value chain
internally and across the national boundaries within the multisite system of
the overall organisation.
1.1.4 ERP system
ERP systems' roots are in the manufacturing resource planning
(MRP) system of 25 years ago. ERP was developed to support the value chain
operation in the manufacturing and services sectors. According to Siriginidi
(2000:378), an ERP system is an integrated suite of application software
modules providing operational, managerial and strategic information for
organisations to improve productivity, quality and competitiveness. Its
utilisation balances the resources of an enterprise such as human resources,
machines, materials, methods, money and marketing to remain competitive in a
globalised economy.
However, the latest enhancement of MRPII, with added
functionality such as order management, financial management, warehousing,
distribution production, quality control, asset management and human resources
management is considered «the back-office». The range of
functionality of ERP systems has further expanded in recent years to include
the more «front-office» functions such as sales forces and marketing
automation, electronic commerce and supply chain systems. ERP systems consist
of various functional modules, which include:
· Engineering data control (bill of materials, inventory
and purchase);
· Resource flow management (production scheduling, finance
and human resources management);
· Works documentation (work order, shop order release,
material issue release and route cards for parts and assemblies);
· Material requirement planning; and
· Shop floor control and management, and others like
costing, maintenance, logistics and management information systems.
In Bernroider and Tang (2003:4), Boubekri refers to an ERP
system as a fine expression of the inseparability of IT and business. It is
also an enabling key technology as well as an effective
8
managerial tool that allows companies to integrate at all
levels and to utilise important ERP applications such as supply chain
management (SCM), financial and accounting applications, human resources
management and customer relationship management (CRM). Sarkis and Sundarraj
(2000:205) postulate that ERP aids the integration of the various functional
processes within the organisation's value chain. In addition, Balls et al.,
(2000:94) assert that a well-operated ERP system makes value chain integration
much more powerful.
According to Slooten and Yap (in McAdam & Galloway,
2005:281), ERP is defined as an
integrated, multidimensional system for all
functions, based on a business model for the planning,
control and global
(resource) optimisation of the entire supply chain, by using state-of-the-art
IS/IT
that supplies value-added services to all internal and
external parties. According to Siriginidi(2000:379-87), the
deployments of ERP package, selection and implementation play a significant
role. The most important aspects of the modern ERP system lie
mainly in:
· The integration, which would be implicit in the design of
the system software that allows a considerable amount of integration between
different elements of the business;
· The systems packages, which could be customised and
parameterised to suit the needs of individual organisations before
implementation; and
· The designs of a proper network infrastructure, in which
the application architecture and transaction density factors play a vital
role.
There are about 500 ERP applications available on the market.
The select list of ERP packages is Baan from Baan, eBPCS from SSA, CONTROL from
Cincom Systems, MFG/PRO from Qad, Oracle from Oracle Corporation, Peoplesoft
from Peoplesoft, SAP R/3 from SAP AG, JD Edwards, Marchal from Ramco System,
Axapta solution from Microsoft, Ariba, Commerce One, etc. Technically most of
the system packages have a few common properties, and they are based on a
central, relational database, built on client/server architecture (Shehab,
Sharp, Supramaniam & Spedding, 2004:5).
Despite scepticism about ERP system performance, Adam and Carton
(2003:22) mention that the growth in the system's popularity is linked to the
following two aspects:
9
· An increasing business trend towards
globalisation, mergers and acquisitions, short product life cycles, the fear of
looming disasters from an ageing legacy system that cannot handle dates beyond
the end of the century (commonly known as the year 2000 problem); and
· ERP appears to solve the challenges posed by means of
portfolios of «disconnected, uncoordinated applications that have outlived
their usefulness» (Kalakota & Robinson in Adam & Carton,
2003:22).
1.1.4.1 Factors contributing to the problem
With regard to organisations that are re-engineering their
process systems, the disparate systems and processes are usually at the root of
the problems that drive them to consider ERP implementation. Some examples of
these drives mentioned by Travis in Sarkis and Sundarraj (2000:203) are:
· Current system no longer supports organisational needs
and requires significant resources for maintenance and support;
· Current system uses multiple points of input, often
with a duplication of effort and a risk of having conflicting sets of
information, and employees cannot answer simple questions from customers;
· Incompatible business processes stem from the lack of a
periodic re-engineering effort or from acquisitions or mergers, and information
from the current system is outdated; and
· Management wants to incorporate advanced scientific
methods into decision making.
1.1.4.2 Selection and evaluation of ERP
systems
Baki and Cakar (2005:75) note that choosing the right ERP
systems package has become more important. Shehab et al., (2004:6) underline
the difficulties of system selection because of the similarities and design
differences in most of the system packages and the availability of many
software packages on the market. In fact, implementing an ERP project becomes
challenging and is an even more complicated process due to the lack of proper
evaluation and the system attributes, which sometimes result in the failure of
many projects. Therefore, for ERP implementation projects to succeed, it is
crucial for the organisation's management to have a strategic IT plan in order
to determine how the company IS can be used, managed and suit the
organisation's objectives. In the context of the appropriate selection and
evaluation of ERP software, a methodical approach model
10
has been compiled by the researcher that will be positioned as
contributing to any MNE in the process of migrating business systems.
The scope of ERP implementation in the organisation
encompasses what is often referred to as the entire value chain of the
enterprise from prospect and customer management to order fulfilment and
delivery. The ERP system emphasised in this study is the Axapta Microsoft
software solution. The assessment and analysis, and extensive literature review
of the value chain approach as well as of ERP system theory will reveal whether
the Axapta software is compatible and well designed to add value to the MNE
value chain.
1.1.5 Axapta Microsoft software solution
The Axapta Microsoft business solution is a multiple
language, multiple currency solution, and it is ERP software with core
strengths in manufacturing and e-business, and a strong functionality for the
wholesale and services industries. Its comprehensive functionality, scalability
and flexibility enable medium-sized and large MNEs to take advantage of
opportunities to grow their business (Axapta Microsoft software base study:
available online). Axapta will be discussed in detail in chapter 5 of this
study as a case study.
