Issues and Constraints of ERP Implementation in Small and Medium Enterprises (SMEs)

The Concept of Enterprise Resource Planning (ERP) in Organizations

Question:

Describe about the concept of Enterprise Resource Planning (ERP) in organizations. 
 

This present research study is conducted through concentrating on the concept of Enterprise Resource Planning (ERP) in organizations. It has been found that specifically the SMEs (Small and Medium Enterprises) find difficulties in implementing their ERP system due to the presence of certain constraints. Lin, Zhao and Wei (2014) opined that ERP is software that helps the organizations in their business process management. Whereas, Chou et al. (2014) explained that it is broad set of organizational activities that helps to manage the business operations. In order to be more precise, it helps to manage and monitor supply chain, human resources, planning projects, product lifecycles, inventory finance, procurements, and other management activities of a business. Following the viewpoint of Madapusi and D'Souza (2012), the key functional are of ERP system include financial accounting, management accounting, human resources, manufacturing, order processing, supply chain management, project management, customer relationship management and services.

It has been found that it is one of the popular software packages that is expensive and time consuming in nature. Due to effective implementation of ERP system, the organizations achieve a number of benefits. Chou et al. (2014) stated that the ERP system improves the quality and efficiency of the business. More specifically, it supports the upper level management in decision making process and leads the business to obtain better outcome. However, the major constraint is the high cost implementation and maintenance expenses (Madapusi and D'Souza 2012).

In the ‘assessment 1’, the research questions had been elaborated that helped in conducting the research. In the present study, the research questions are demonstrated along with the objective of the research. Both the research questions and research objectives help to drive the research towards right direction. Apart from this, the literature review section establishes the brief understanding of the research topic. In order to discuss build the conceptual framework of the ERP system, the study has gathered information as well as knowledge from various books, academic journal and relevant websites. The research hypothesis is mentioned in this particular section of this study. Afterwards, the study discusses about the methods and techniques which are considered during conducting the study. Research design has created the road map through which the research can achieve its objectives. In addition, the data collection process as well as the outcome is manifested well. At the end of the study, the entire research is concluded. It helps to bring out a number of recommendations that help to resolve the research problems.

Research Objectives: The prime objective of this research is to reveal the issues and constraints that affect the implementation process of Enterprise Resource Planning, particularly in small and medium enterprises.

Research Questions: The research question is 'How the issues affect the organizational operations in three phases of pre-implementation, implementation, and post-implementation ?”.

In order to be more precise, the research questions mainly concentrate on revealing the issues that the SMEs are confronting in their pre-implementation, during implementation, and post implementation phases.   

The Benefits of Implementing ERP System

3.1 Importance of ERP system in SMES

As per the statement of Nwankpa and Roumani (2014), some reasons are there for which the SMEs need to implement ERP system in their business activities. The importance of ERP system in business activities highlights transparency, data reliability, integration of new technologies, reduce total cost of ownership, and reduce operational risk. In order to elaborate the importance of transparency, Wei and Ma (2014) stated that the SMEs find difficulties to make their business profitable in shorter time span. This is the reason that the organizations need to address the profitable factors along with the factors that affect their business, in a rapid manner. In has been found that the SMEs confront plethora of problems to identify those factors and inject new ideas. Reliable ERP system helps them in strategy execution (Jenatabadi and Noudoostbeni 2014).

Wei and Ma (2014) explained that data reliability is a crucial factor that helps to enhance the transparency of business. The SMEs find complexities in modifying one flow to other and predicting whether the new system would be profitable or not. It is very hard to take risk at the consequences where degree of uncertainty is too high. Through establishing effective ERP system, they are able to diminish the degree of risk and enhance the level of profitability as well. Furthermore, the ERP system helps the SMEs in fast deployment of innovating new technologies. In this context, Jenatabadi and Noudoostbeni (2014) added that through proceeding with the existing system properly, the organizations do not need to change the organizational system. As a result, the SMEs are able to reduce total cost of ownership by do not offering any radical evolution. Along with that, it reduces the operational risk which creates hitches in the path of obtaining more revenue as well as profit. As the ERP system helps to make the organizational operations more effective and as a result the organizational system improves and the level of risk diminishes.

Teittinen, Pellinen and Järvenpää (2013) elaborated the fact that the SMEs confront plethora of issues and challenges in introducing as well as incorporating ERP system in their business operations. The prime issues and challenges are made regarding awareness, perception, earlier implementations, approach to implementation, cost and change management. As discussed by Marsh et al. (2014), low level of awareness is found among the SMEs for ERP vendors, ERP applications, and many more. In most of the cases, the leaders of the SMEs are not aware well about the effectiveness of ERP system, and their scope of improving the business operation through existing ERP system. Along with that, most of the SMEs have a perception that only the large firms need to incorporate ERP system in order to manage their high cost acquisition, implementation, and maintenance (Ahmad and Cuenca 2013). They further belief that the large firms face complexities in maintain their ERP system. As the SMEs are engaged in small size businesses, they have the perception that they do not need to incorporate any ERP system, or the system might increase their level of difficulties.

The Challenges and Constraints of Implementing ERP System in SMEs

Following the statement of Seethamraju (2015), much of the organizations fail to implement the ERP system which led them to bankruptcy. This earlier failed implementations cases make the SMEs belief that the ERP implementation is waste of effort as well as time which might diminish the entire business. The SMEs are advised by the ERP vendors to consider the effective ERP system in order to bring out the best business practices. This approach of implementation makes both the vendors and the SMEs profitable. The fewer amounts of capital and high cost are the prime reason that the SMEs tend to take their step back from incorporating the ERP system (Ahmad and Cuenca 2013). In most of the cases, the ERP implementation process is failed due to being considered as an automation project instead of changing management process. The leaders of SMEs fail to effectively utilize their ERP system because all the stakeholders are not ready to accept the changes (Teittinen, Pellinen and Järvenpää 2013).

According to Ahmad and Cuenca (2013), the major factors that affect the ERP implementation process include provided data, parallel system, training and testing, expectations, and employee retention. Strong management system is needed in order to provide adequate as well as appropriate data. The inadequate data create hitches in ERP implementation process for which they fail to formulate the standard format of the data and the system as well. Ram, Corkindale and Wu (2013) added that the parallel system should be avoided in the ERP implementation process. In order to be more precise, when the SMEs face issues after in finance module after implementing the ERP system, they ignore the sales and distribution module. Further, they back to the old system and hence the proper integration process id hampered. The support systems that the vendors provide become more difficult and obsolete to implement. Furthermore, the inappropriate training to the team and ineffective testing of the present ERP system create constraint in effective implementation process. Gupta et al. (2014) stated that the management of the SMEs clearly states their expectations about the return on investment. Whereas, the vendors found that the expectations are not practical as it takes around four months to determine the significant return. Apart from this, the ERP implementation process of the SMEs is affected due to facing problems in employee retention (Ahmad and Cuenca 2013). In some cases, it has been seen that the firms experience great losses when the employees quite job after being provided training.

As stated by Al-Hinai, Edwards and Humphries (2013), the SMEs confront complexities in implementing the ERP process due to their limited resources. The limited resources of the firms restrain the business to enhance and improve further. Due to having limited resources, they face more difficulties in selecting the most effective ERP system, which would help them to generate more profit. The selection of ERP system and selection of vendor should be aligned in order to bring out the best practice. The SMEs are engaged with small number of vendors and thus they need to select their vendors that make them profitable. Along with that the selection of consultant is one of the crucial parts in the pre implementation phase of ERP system (Schniederjans and Yadav 2013). It has been found that the consulting team helps the organizations to make an informed decision and make the current system more valuable. Thus, it is way much important to select the correct consultants so that they can achieve their goal within certain time period (Al-Hinai, Edwards and Humphries 2013).

The Research Questions and Objectives

Katerattanakul, Lee and Hong (2014) opined that most of the issues the SMEs confront in the ongoing implementation phase of ERP system. Before initiating the process, they need to outline the proper system of implementation. Most of the SMEs do not know which practices would be more benefited for their business and thus they face issues in considering any certain system. Along with that, proper implementation approach needs to be applied in ERP implementation process (Chofreh et al. 2016). The implementation approaches vary due to differences in the business processes, goals and short term objectives. Besides, it has been mentioned that the most of the SMEs have a perception that the ERP implementation is the waste of time and money. Thus, it is essential to determine the implementation time and cost to reduce the risk of failure (Katerattanakul, Lee and Hong 2014). Moreover, they fail to indentify all the scopes of ERP implementation and thus lack of appropriateness is found in project planning (Chofreh et al. 2016). Besides, they fail to address the exact reasons that drive them to change the organizational processes and systems. These issues lead them to confront failure or bear high cost (Katerattanakul, Lee and Hong 2014).

As discussed by Galy and Sauceda (2014), the SMEs ignore their roles and responsibilities towards their business after implementing the ERP system. In the post implementation phase, the SMEs confront some major issues regarding security risk, operational issues, insufficient training arrangements, human consequences and employee retention. In order to secure their data, the firms need to increase the security of their ERP system so that they would able to reduce the operational issues. As the SMEs fail to restrain the security risks, they face more operational issues (Chou et al. 2014). Galy and Sauceda (2014) added that in some cases the SMEs do not provide training programs to the staffs and thus lack of knowledge and skills lead the business towards failure. The reason behind not providing training programs is to restrict the cost of implementation (Chou et al. 2014). The human resources are the key strength is of the business. Due to the changed management and operations process, most of the employees quit their job as they found that they might not fit in the changing environment. Thus, the employee retention is the greatest issue that the SMEs confront in the post implementation phase of ERP system (Chou et al. 2014).

The research hypotheses for this present research are as follows:

H₀: SMEs of Australian market does not face any kind of issues while implementing ERP system

H₁: SMEs of Australian market faces several issues while implementing ERP system   

4.1 Type of research taken

Mackey and Gass (2015) depicted that the research methodology is a procedure that is undertaken in order to accomplish the complete research. In a view to supporting the research, primary research system is being considered. The primary research signifies that the information is collected personally by conducting an interview with the managers for attaining better information regarding the problem faced by them for implanting new ideology for the betterment of their organizational functionally so that they can achieve more profitability. 

The Importance of Transparency in Business Activities and Data Reliability

In the context of the measurement and the scaling techniques, the focus group has been considered. These focus groups are the managers of the ten different selected SME for discussing the issues they are facing from the initiatives taken for the implementation of the ERP systems. Gibbs (2012) illustrate that the primary reason for considering the managers as the focus group is that, they are closely associated with the operational functionality of the ERP system. Some of the managers are supervising the implementation of this system and hence can illustrate the problems more efficiently.

Trotter (2012) portray that sample design is considered for research in order to analyze the problems by taking some respondents for the research known as sample size. For this research, the sample size that is considered is 10, and all of them are managers from each SME respectively. Proceeding this way, the different problems can be analyzed that they are facing by the implementation of the ERP system within their organization.

Palinkas et al. (2015) stated that data can be collected mainly in two ways – primary and secondary data collection.  In this research study, primary data collection is being used for attaining appropriate information from the managers of the Small and Medium Enterprises (SME) regarding the issues faced by them for the post implementation of the ERP system for their business procedure along with the problem faced during the implementation phase and the post-implementation phase. Nomano et al. (2014) depict that in primary data collection method two more methods have been used - qualitative and quantitative. In order to accomplish the research, qualitative method has been considered. Moreover, Landt and Melville (2013) portray that in order to support the content of the literature review, secondary data has been collected through some articles, case studies and blogs for gathering information on ERP system and the evolved issue due to that.

Data analysis is a procedure that is being used for evaluating the outcome of the result of the research. In order to support this research study, three different variables are being considered - pre-implementation, application and post-implementation of the ERP system with their business procedure. Moreover, the sample size that is being taken into consideration is 10. The obtained value of the data collection, two statistical procedures is put into operation that is the frequency distribution and the correlation method.

Hillier et al. (2013) illustrate that the primary advantage of evaluating the frequency distribution is to analyze which issues have more significance in every targeted SME organization.  It is evident that not all SME will use the ERP system for the same purpose and hence by evaluating which issues is occurring more compared to others; an organization can take appropriate steps to mitigate the circumstance. Tran et al. (2014) demonstrate that the advantage of evaluating correlation is to determine the dependency of the issues of one variable to the other. Elaborating the scenario, how much the issue faced during the pre-implementation of ERP system is dependent on the issues occurring in the implementation phase.

The Issues and Challenges that SMEs Confront in Implementing ERP System in Their Business Operations

Various issues are created while implementing “Enterprise Resource Planning” systems to various small and medium scale enterprises. Data was collected by questionnaire method and the managers of these small and medium scale enterprises were interviewed to fill up the questionnaires. On answers of the survey revealed that there are three phases of the implementation of “Enterprise Resource Planning” systems (Gröchenig 2013). The first phase was “pre implementation phase”, the second phase was “implementation phase” and the third phase was “post implementation phase”. Ten different small and medium scale enterprises were chosen for this survey. It was found that the ten different small and medium scale enterprises had different problems at the three different stages of implementation of “Enterprise Resource Planning”.

On considering the “pre implementation phase”, it was seen that the first, seventh and eight small and medium scale enterprises had issues regarding the “limited resources”. Second, fourth, fifth and ninth small and medium scale enterprises had issues regarding “selection of ERP system”. Small and medium scale enterprises number three and ten had issues regarding the “selection of vendor” while sixth small and medium scale enterprises had issues regarding the “selection of consultant” (Cao et al. 2013). Thus, it was seen that most of the enterprises had problems regarding the “selection of ERP system" and the least number of problems was faced due to “selection of vendor”. This could be the result of availability of various “ERP systems” and the enterprises could not select the best “ERP system” for their enterprises.

Figure 1: Issues regarding pre implementation phase

(Source: created by author)

Considering the “implementation phase”, it was seen that first and tenth small and medium scale enterprises had issues regarding the “proper system implementation”. Third and ninth small and medium scale enterprises faced issues regarding the “approach of implementation”. Second small and medium scale enterprises had problems regarding “implementation time and cost” (Hoch and Dulebohn 2013). Sixth and seventh small and medium scale enterprises had problems regarding the “Clearly defined scope of implementation procedure”. Fourth had problems regarding “Proper project planning” while the fifth and eighth had problems regarding “Minimal customization of the system”. None of the small and medium scale enterprises had problems regarding “organisational changes, process changes” (Boashash 2015). Thus, it was seen that the issues faced during the “implementation phase” were different for different enterprises. This is because different enterprises had different line of business and their issues were different from each other.

Figure 2: issues faced during the “implementation phase”

(Source: created by author)

For the “post implementation phase”, it was seen that there are five types of problems that could arise. The analysis of the views of managers of the selected small and medium scale enterprises reveals that fourth, ninth and tenth enterprises had issues regarding “security risks”. The first enterprise had issues regarding operations (Cao et al. 2013). The second, third and eighth enterprises had issues regarding the “insufficient training arrangement”. The seventh small and medium scale enterprise had “human consequence” related issues while the fifth and sixth small and medium scale enterprises faced problems due to “employee retention” (Galy and Sauceda 2014). It was seen that most of the enterprises had problems regarding the “security risks” and “insufficient training arrangement”. These two factors are the major concern in any business. Insufficient training would lead to incapable employees who cannot perform well in the business. This would result to loss in business. Security is another important issue that would cause harm to the business if not implemented properly. Thus, various problems were faced by different enterprises which could be the cause of their different domain of business.

The Perception of SMEs towards ERP System Implementation

Figure 3: Problems faced during post implementation phase

(Source: Created by author)

On performing the correlation coefficient between the three variables, it was found that the correlation coefficient between “pre implementation phase” and “implementation phase” was -0.200221822 (Tasevsk et al. 2014). This suggests that there was a weak negative correlation between these two variables. The more is the issues regarding “pre implementation phase”, the lesser would be the problems during “implementation phase”. This is because new strategies could be framed on facing problems during “pre implementation phase”, which would help in the smooth running during “implementation phase”. The correlation coefficient between “pre implementation phase” and “post implementation phase” was 0.158672185 (Chou and Hong 2013). This weak positive correlation suggests that more problems during “pre implementation phase” results in more problems during “post implementation phase”. The correlation coefficient between “implementation phase” and “implementation phase” was found to be 0.521650593 (Tasevsk et al. 2014). This suggests a moderate positive correlation between the two variables. It could be interpreted that facing more issues during the “implementation phase” would result to more issues during “post implementation phase”. This is because problems during “implementation phase” would lead to various issues that would be carried forward to the “post implementation phase”.   

6. Conclusion and Recommendation

6.1 Conclusion

It is concluded from the entire study that some Small and Medium Enterprise faces problems for the implementation of the ERP system for the betterment of their organization. The issues that they are facing mainly in occurring in three phases - pre-implementation phase, implementation phase and the post-implementation phase. The issue that they are facing in the pre-implementation phase is the limited resources for the implementation, selection of the effective system, vendors and their consultant. However, proper system and approach implementation cost and time along with the proper project planning are some of the problem faced during the implementation phase. Moreover, the post-implementation have a security risk, operational issues. Improper training to the staffs for handling the ERP system is also a major problem after implementing ERP within the organization.

The primary requirement regarding the effective ERP system is to make a clear and extensive list of ERP requirement that will be beneficial for the organization. These well-defined evaluation projects result in the better implementation of the new system. The existing staffs must be provided adequate training by the experts and professionals so that they can manipulate the implemented ERP system. Training procedure must comprise of three steps – on design, test the system and post go-live. On design resembles the high-level design by conducting a conference with the employees. Testing procedure resembles the early testing of the new system and its regular assessment so that any evolved problem can be resolved in the initial stages. Lastly, in the context of the post go-live is the stage where the employees ask frequent question as they are trained to use the new system. These problems were not addressed during training documentation but can be resolved by expertise suggestions.

Apart from the professional trainers and vendors of ERP system provider, it is compulsory for SME to appoint some ERP product professionals. Relying only on the selected vendors, an organization cannot obtain all the appropriate references to what correct procedures, the negative impact of the occurred problem if any and what system is being differently used in their ERP model that result in a better outcome for the organization. These ERP product professionals can select appropriate measures for utilizing significant time, energy and money with implementation partners. Successful ERP system must have to be high in its classification and hence it is crucial for developing or implementing a robust ERP system by validating the documented solution design and addressing the key pain points. 

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