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Enterprise Resource Planning (ERP) System: An Effective Tool for

Production Management

Article in Management Research News · June 2005

DOI: 10.1108/01409170510784878

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 Biographical Notes Enterprise Resource Planning (ERP)
A.P. Kakouris is a
Research Associate in the
System: An Effective Tool for
School of Administration
and Economics, Production Management
Technological
Educational Institute, Ag. by A.P. Kakouris and G. Polychronopoulos
Spyridonas Street,
Aegaleo, 122 10 Athens, Abstract
Greece. G.
Polychronopoulos is a Independent of the size of the company, an Enterprise Resource Planning
Professor at the same (ERP) system can either boost or doom a company, if implemented success-
School.
fully or unsuccessfully. There is a great deal of supporting evidence from the
literature, mainly from large manufacturing and service organisations. This
article adopts a case study approach to investigate the selection and imple-
mentation activities in a manufacturing company in Greece focusing mainly
on production management aspects. The goal is to provide insight into the
ERP functionality with respect to production and thus the selection of an ac-
tual business case proves how the enterprise successfully implemented and
integrated such a system, highlighting the processes used, the obstacles faced
and how they were overcome, as well as the gains achieved. Finally, it pro-
vides useful information and practical suggestions that may help production
managers and users to get a better understanding of how to deploy such sys-
tems.

Keywords: ERP, SAP, Production, Implementation.

Introduction

Nowadays, manufacturing is faced with a constantly changing, uncertain en-

vironment that compliments the intensifying and competitive environment
in which companies operate in general. Competition is accelerating and re-
quirements are becoming more demanding. It is a customer’s market. The
pressure on manufacturing companies is to reduce costs and increase the
quality of products and services. Production management (Neely, 1991) is
essential to cope with the demanding nature of the business and in order to be
successful; it must successfully manage the manufacturing of the saleable
products. This is accomplished by:
· Understanding how planning, scheduling, shop floor control and
stocks affect manufacturing
· Integrating manufacturing with other functions, such as supply
chain, etc.
· Having in place an effective and efficient1 manufacturing set up.
On the other hand, for some years now companies have been searching fran-
tically for tools to gain better control of their business. The utilisation of the

Volume 28 Number 6 2005 Management Research News

continuous changes in technology, in order to satisfy the continuous needs
and demands of prospective business, has been the greatest challenge for ev-
ery company that wants to lead in the years ahead. The correct selection and Enterprise
implementation of such technologies are the key drivers that will certainly Resource
lead to success. Materials Requirements Planning (MRP), its extension Man- Planning (ERP)
ufacturing Resources Planning (MRP II) [Ang, et al., 1990; Primrose, 1990; System
Burns, et al., 1991; Salaheldin and Francis, 1998; Wong and Kleiner, 2001]
and the later ERP systems are some of the technologies that support towards
this direction [Muscatello, et al., 2003). However, there are many cases, as
the relevant literature reveals, when such software projects fail; and it is not
always because the applications did not work (Bicknell, 1998; Boudette,
1999), but because the enterprise rejected them [Laughlin, 1999].

The objectives of this article are:

· To show the evolution of enterprise software and how each
evolutionary step has been built on the fundamentals and
principles developed within the previous one, so that this
knowledge will stand us in good stead for future solutions.
· To support all the people involved in implementing such
solutions
· To provide useful information and practical suggestions that may
help production managers and users to get a better understanding
of such systems
· To present some of the lessons learned from the effect that this
project has had on the implementation on the company and the
individuals, as understanding of these effects can provide a
blueprint for a higher level of success in similar projects in the
future.
The article is not primarily about computers and software. Rather, its focus is
on people: how to provide them with decision-making processes for software
selection and how to integrate it into a production orientated environment. A
real case study has been selected and presented showing how a manufactur-
ing company had successfully implemented and integrated such a system.
Moreover, it highlights the processes used, the obstacles faced and the gains
achieved. Finally, it helps plot a decision path forward, based on the objec-
tive and thorough analysis necessary for the selection of the company’s sys-
tem(s), always bearing in mind that people, costs and technology must be
simultaneously managed through changes to ensure success (Nah, et al.,
2001).

Evolution of ERP

In the 1960s, no company could afford to own a computer. Therefore, both

manufacturing and inventories were handled on the basis that companies

67
 must hold enough stocks to satisfy customer demand, and that customers
would order what they had ordered in the past, quantity-and time-wise. In the
Enterprise 1970s and 1980s, when computers became small and affordable, attention
Resource was focused on materials requirements planning [MRP] and master produc-
Planning (ERP) tion schedule [MPS]. MRP started as a system for planning raw material re-
System quirements in a manufacturing environment; an idea that was later extended
to the “closed loop MRP.” Soon it evolved into manufacturing resource plan-
ning (MRP-II), which used the MRP system as a basis and added scheduling
and capacity planning activities. In the early 1990s, MRP-II was further ex-
tended into enterprise resource planning (ERP), incorporating all the MRPII
functionality, in addition to Finance, Supply Chain, Human Resources and
Project Management functionality. Figure 1 illustrates the gradual evolution
of the ERP with respect to time.

1960’s 1970’s 1980’s 1990’s

Handling of
MRP MPR-II
Inventories MRP ER ERP

-II P

Figure 1: Evolution of ERP systems

ERP integrates key business and management functions and provides

a view of the happenings in the company, in the areas of finance, human re-
sources, manufacturing, supply chain, etc. (Davenport, 1998; James and
Wolf, 2000). An ERP software solution is valuable when it embodies the
characteristics illustrated in Figure 2. ERP software can be built up either by
purchasing the whole package from a single vendor or by using pieces of
software from different supplier(s). In the first category, the leader is the Ger-
man company SAP AG with its R/3 software, together with PeopleSoft Inc.,
Oracle Corp., Baan Co. NV and J.D. Edwards & Co. (Jenson and Johnson,
1999). Any company considering investing in one of these softwares is faced
with a serious decision as to whether to actually invest or spend the resources
on improving other parameters of the company. If the decision is in favour of
software-implementation, the next step is to select the most appropriate one
from a broad choice of equally good solutions, ensuring at the same time that
the selected system will fulfill the planned objectives.

68 Management Research News

 Workflow Multifunctional Enterprise
Managed Resource
Integrated Planning (ERP)
System
Secure
ERP Modular

Accessible
Parametric
Flexible

Figure 2: ERP Characteristics

Case Study

A. Objectives

The following case study presents the decision approach followed by a local
company in implementing a new ERP system with the aim:
· To integrate the information and software aided procedures in
order to optimise performance and support decision-making.
· To minimise the internal customer dissatisfaction
· To achieve:
(a) ongoing cost-effective improvements in manufacturing services
(b) labour savings
(c) inventory reductions
(d) better management of the resources used, and
(e) better process execution through the efficient use of the ERP
solution.
B. The Company and its Environment

The company is a holding of a group of companies, and has been in operation

for nearly seventy years. During that period, it has been developed into a
complex of agricultural companies providing farming supplies and services.
It is a manufacturing and commercial company with more than 100 employ-
ees and subsidiaries in Bulgaria, Romania and Yugoslavia. Its strategic alli-
ance with a Japanese multinational has pushed the company so that it is

69
 amongst the leaders of its kind in Greece with significant export activities in
the Middle East, Pakistan, etc. For its production facilities, it employs a staff
Enterprise of around 30 full-time employees and 30 part-time ones. It acts as a toll man-
Resource ufacturer providing service to both local and multinational clients such as
Planning (ERP) Ciba, Dow, Monsanto, Basf, FMC, Syngenta, etc. The company is fully
System equipped to import/export, pack/re-pack, warehouse, physically distribute
and administrate, or in short, manage its products on the request of its clients,
using both make-to-stock and made-to-order processes.
C. Maximising Production Performance with a New ERP Solution
As a result of its successful strategy during the last few years, the company
has grown substantially. Its strategic alliance with a Japanese multinational,
which acquired an equity stake, has transformed and upgraded the company.
This transformation, together with the requirements of the toll manufacturing
activities has forced the company to implement a new ERP solution. Before
the new ERP implementation the company had a tailor-made ERP solution,
with some of its functions linked together. The system has been in existence
for fifteen years.
Over the years, it has been modified and customised to functions’
needs and facilitates the daily operation of the company, supported by an IT
department, responsible for: the technical support of the system, its mainte-
nance, and the extension and development of the applications. Manufactur-

MP MR Pr QC
S P od/
n
Working in silos

MPS

QC MRP

Prod/n

Figure 3: Production Management View

70 Management Research News

ing was deploying “a kind of MRP” and planning was done in silos. This led
to high stocks, proliferation of different planning processes, a relatively high
level head count, communication problems, etc. The company was far away Enterprise
from the desired situation of “having the right inventory and effective and ef- Resource
ficient production.” The project lasted 14 months. The selected software be- Planning (ERP)
longs to CSAP R/E 4.6; the relational database is the SQL Server and the System
functional system Windows NT. Figure 3 illustrates a production manage-
ment view of “how the situation was before” and “where it has decided to
go.”

D. Reasons for Abolishing the Old ERP Solution

As a first step, the company went into an internal audit, trying to identify the
reasons and answer questions, such as:
· Why a new ERP was needed in place of the old one?
· What was its essential scope for the company?
· What would it bring to the company?
As the deployment of an ERP is definitely expensive in terms of effort, time
and money.

The reasons for implementing new software are well known and beyond the
scope of this article. However, the following three specific company oriented
points are worth mentioning:
· The current application had become obsolete (text environment),
difficult to maintain and above all it was a pool of application
rather than integrated software.
· The need for on-line information, the necessity of a common
working platform within the group together with the elimination
of multiple entries for the same operation entity.
· The pressure from the third party companies to implement an
ERP solution, which could be interfaced with their system for
EDI transmission.
E. Reasons for Selecting the New ERP Solution

The next step the company had to do was the justification of the project, that
is: How did it know if the specific ERP system fulfilled its strategic goals? In
other words, how did it know that SAP was the right ERP tool for the com-
pany?

It is beyond the purpose of this article to describe the benefits of in-

stalling an SAP solution. What is important is to outline the reasons for the
specific selection, which include amongst others:

71
 · Its proven record of success in similar companies
Enterprise · Its Chemical & Pharmaceutical (specific) modules (solutions)
Resource which come as an enhancement to the standard system; most
Planning (ERP) appropriate for the specific company where process
System manufacturing, quality management, process costing and
plant-specific business processes were viewed as important
software components
· It handles dangerous goods
· It has an excellent interface to MSOffice applications and other
reporting tools, so it can be linked with the company’s sales and
marketing tools
· It is widely parametric
· It is the most mature system compared with any other ERP used
in Greece
· The local support for the implementation phase and further
support is at a high level
· It is quite attractive as value for money
· The supplier’s financial strength and its reputation for quality.
F. Selection and Implementation Phases

The project was divided into three main phases, namely: selection, imple-
mentation and post-implementation.

G. Selection of ERP

The first phase started in early 2001, by collecting Request For Information
(RFI) from the major software suppliers in Greece. After a first screening,
from the company’s cross-functional selection team, based on product and
vendor capabilities, by June 2001, four potential suppliers were selected (two
international and two Greek) which were invited to present their product to
the company’s management. The presentation was based on the company’s
needs and gave a general feeling of the functionality of the systems. More-
over, they were asked to provide their Request For Offer (RFO) based on a
detailed specification sheet by functional module and business area, pro-
vided by the company. Furthermore, a group of managers visited companies
where the bidders had deployed similar products, in order to discuss the vari-
ous problems during implementation and daily working practice. The selec-
tion team examined the detailed RFQs and also compared prices, finally
selecting the SAP solution as the best value for money.

72 Management Research News

 The last part of the selection phase involved the choice of the consul-
tant that would assist the implementation of the system, following a process
similar to that of ERP-selection. Enterprise
Resource
H. Implementation of ERP Planning (ERP)
System
The implementation was divided into four stages:
I. Blueprint phase: Analysis of all business modules and functions, where the
key users of each module together with the responsible consultant, analyse
and document all working scenarios in detail and finally outline the proposed
parameterisation and functionality of the system to be delivered. The prob-
lems that occurred in this phase were:
· The key users were usually referred to the common daily
practice and forgot to refer exceptions that occurred once or
twice per year, thus preventing the full parameterisation of the
system.
· Key users were lacking basic knowledge of software engineering
practices, necessary to understand and “translate” the proposed
system functionality (as was presented by the consultant).
· The consultant did not have a wide industrial background, so
during the discussions of production and planning modules,
there was a lack of understanding of the specifications.
· Key users did not have the complete picture of the company’s
functionality, so they eventually forgot to check if their proposed
parameters affected other process areas. This was quite critical
not only for the common daily practice but for statistical
groupings, too.
II. Development phase: At this stage the documented blueprints were trans-
lated into software implementation and each scenario was tested to stand
alone between the key user and the consultant. The problem in this phase was
again the crosschecking in interoperation of different business areas.
III. Integration test: This phase involved loading of sample data in order to
check the interoperability of the functions and the working scenarios in de-
tail. The major problem of this phase was the time span allocated, as it was
not possible to prepare a complete set of data, as demanded by SAP function-
ality. In order for an integration test to be successful and thoroughly checked,
there must be at least a two month period where users should be dedicated to
checking the system compared to their working needs. This phase is crucial
because it reveals anything forgotten during the blueprint phase and allows
modifications to be made before the “live system.”
IV. Data migration and live startup: The ultimate phase comprises raw data
preparation, check and validation, uploading and final verification. This is

73
 the most difficult part especially when a company has thousands of materials,
customers and vendors. Data preparation has to start in the early phase of im-
Enterprise plementation in order to consider the new structural data that have to be
Resource added to those existing in the old system, since SAP implementation gives
Planning (ERP) the opportunity to classify any data under various hierarchies and groupings.
System That means that the more you want, the more you have to prepare and check,
before the system goes alive and the supplier goes offsite.

Live operation: No major problems were observed, apart from the fact that
the degree of familiarisation of the end users with the new system was not at a
good level, due to the short time spent on training, something well balanced
by the great effort made by these users later during the operational process.
As a matter of reference, the company operated normally with minimal prob-
lems, after seven days from the time the system went live.

J. Post-Implementation of ERP

With the system in place, the next scheduled step is to audit (check) it against
its qualitative and quantitative selection objectives. A process which has
been organised to take place after one year from the full start up, with further
audits taking place every year thereafter.

Conclusions

For any company that produces and supplies products or services, the process
of producing and delivering on time is critical. Nearly all of them today use
some sort of Information Technology infrastructure as a supporting tool,
which can either stand alone, be integrated to other third party software, de-
veloped in-house or be a fully integrated system. In either case, what is
needed is a flexible and multifunctional integrated solution able to manage,
control, account for, and report all sales-, supply chain- and production-ac-
tivities of the company. It also needs to be integrated not only internally but
externally too, to link systems together along the entire chain. ERP software
is such a lever. It must be seen as a foundation for a company to avail itself of
the new technological opportunities and not just as a back-office solution.
The successful deployment of an ERP solution is an integral part of the suc-
cess of the company. The selection and implementation phases are painful;
but may be necessarily so, if it is to achieve successful results, in the end.

This article dealt with some of the major activities involved in the im-
plementation of an ERP system for a production and commercial company in
Greece. The overall aim was to provide an insight from a variety of angles
into the selection and implementation phases that were followed. Of course,
it was not possible to adequately cover all implementation actions, however,
useful insight was given.

The benefits achieved, so far, provide a cost justification and confir-

mation of the will to invest in a new ERP system and amongst others, include:

74 Management Research News

A. Inventory reductions
There are ongoing savings of the inventory carrying costs as a result of Enterprise
proper: Resource
a. netting: by netting demand against inventory to determine Planning (ERP)
market net requirements System

b. purchasing: the company buys what is needed through correct

Bill of Materials [BOM], using parametrical Optimum Quantity
algorithms
c. BOM: all changes in the BOM are encountered, thus preventing
obsolete inventories
d. Planning: production orders are processed faster, resulting in
better control for the work-in-process inventories
e. Manufacturing: it produced what is demanded from time phased
plans
f. Delivering: deliveries match the actual quantities on the right
dates.
B. Labour cost reductions
The reductions in labour costs are the results of improved manufacturing
practices which has resulted in:
a. fewer-shortages, -disruptions and –interruptions, less-rework,
-overtime and –rush jobs.
b. Better visibility of required work, so that capacity is properly
scheduled to meet demands
c. More free time for production personnel who are now used
better and more constructively.
C. Improved customer service
The great degree of integration results in much better coordination amongst
forecasting (sales), production planning and logistics/inventory planning.
This, in turn, has led to better customer service and to fewer lost sales; while
sales people are now concentrating on selling products rather than apologis-
ing for company deficiencies.
Moreover, by providing shipment schedules, reacting to changes in demand
and tracking the progress of orders [Bendoly and Jacobs, 2004], a higher cus-
tomer satisfaction level has been achieved and there are more repeat orders.
D. Improved visibility
As the system provides a basis for linking operations, it allows for real-time
visibility. For example, production planners can now view what and where

75
 the orders are, thus allowing them to schedule against the forecast. This visi-
bility has triggered co-operation and co-ordination between operations and
Enterprise allowed for a better understanding by operational managers of the effects
Resource their decision have.
Planning (ERP)
E. Others
System
1. Flexibility and better access to information, less prone to errors
2. Elimination of most of the manual (paper) work
3. Applying the “one set of data” principle, and
4. Integrating a holistic corporate attitude.
Finally, a number of lessons learnt from the present study suggest:
· Selection of the right people to be the key-users, who, in turn,
will be the liaison between the company and the consultant(s).
These people should have an integrated perception of the
business functions together with a detailed knowledge of their
module. Software literacy is also helpful, especially when it
comes to data preparation.
· Treat consultant(s) as employees and do not let them manage the
company. The company should manage them.
· Detailed description of the working scenarios, including even the
rarest cases.
· Agreement on the statistical data needed by each function in
order to prepare grouping structures and coding.
· Awareness of both management and employees that extra
working effort should be made for a long period of time, on top
of the daily operations.
· Data preparation should start as soon as the organisational
structure of the ERP has been established.
· Business organisational chart and present operation practices
should be re-evaluated and modified against the workflow and
interoperability of the system [Schniederjans and Kim, 2003].
· The more effort that a user puts in the early stages of
implementation, the easier its daily routine will be when the
system goes live.
· An understanding that the selection and implementation process
of a project of such magnitude should not be treated as just
another company-project.
· A radical shifting from functional to process approach.

76 Management Research News

 · Careful handling of the migration process as it should run in
parallel to the running of a profitable business.
Enterprise
· A change in management attitude to support people during their Resource
emotional reactions, together with promotional success practice. Planning (ERP)
An awareness and understanding of these benefits and lessons learnt will in- System
crease the success of future ERP implementations and should be carefully
considered in planning for ERP; always bearing in mind that whilst the po-
tential benefits are high, so is the cost of failure.
Endnote
1. Effectiveness is the degree to which customer requirements are met; while
efficiency is a measure of how economically the resources of the organisation
are used to provide a given level of customer satisfaction [Neely, 1991].

77
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78 Management Research News

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