DESIGN A CONCEPTUAL ERP MODEL FOR SMALL AND MEDIUM ENTERPRISES OF IRAN

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DESIGN A CONCEPTUAL ERP MODEL FOR SMALL

AND MEDIUM ENTERPRISES OF IRAN

Qader Vazifeh Damirchi1, Gholamreza Rahimi2 1

Management Department of Islamic Azad University, Jolfa International Branch, East Azerbaijan, Tabriz, IRAN,

2

Assistant Professor in Management Department of Islamic Azad University, Jolfa International Branch, East Azerbaijan, Tabriz, IRAN

Abstract

Over the last decade, numerous companies have tried to adopt a commercial Enterprise Resource Planning (ERP) package in the world-wide e-business and ecommerce environment. However, most of commercial ERP packages are designed for a large-scaled company so that it is difficult to adopt a commercial ERP package in terms of small and medium-size companies. Therefore, it is necessary for a small and medium-size company to seek for an approach for the ERP solutions. In this paper, authors describe a conceptual ERP model for small and medium-size companies. This paper has presented a conceptual model of implement and development of ERP technology that SMEs can use to in order to promote Innovative and entrepreneurial performance. The integration of various business operations and functions through the implementation of an ERP system is primarily to enable exploitation of future opportunities, better planning and reducing inventory and improving customer services. It is necessary being committed to continuous innovation and reinvention of the firm’s business strategy (organizational entrepreneurship). The optimization (or efficient use) of such information systems is nowadays becoming a major factor for firms striving to reach their performance objectives.

Keywords: ERP, SMEs. Innovation, entrepreneurship

1. INTRODUCTION

As an electronic business environment changes more rapidly under the globalization, even small and medium size companies also change their business. With enterprises becoming bigger and bigger, the legacy business systems may not be flexible enough to adapt this change and the discordance between business and information systems in their organization may occur. Small and Medium-sized Enterprises (SMEs) play an important role in the economies of both developing and developed countries. Many SMEs want to conduct more business and improve their performance using electronic, computer-based and telecommunication-enabled business processes. However, many SMEs have little understanding of, and cannot comprehend, future technological developments [27]. Enterprise systems (ES) provide SMEs with opportunities that are largely unexploited. ES include ERP (Enterprise Resource Planning), CRM (Customer Relationship Management), SCM (Supply Chain Management), and E-procurement systems [25]. During recent years, SMEs have invested considerable resources in the implementation of ERP systems as an e-business technology. ERP is a software package that attempts to integrate all departments and functions of a company into a single computer system that can serve all different departments’ needs [3]. An ERP system streamlines business processes by creating an enterprise-wide transaction structure that integrates the key functions of different departments

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within an integrated information system platform. Through the integration of these diverse systems, organizations can gain a competitive advantage in the rapidly changing digital age. ERP is therefore a key part of the information infrastructure of modern businesses and Companies have invested considerable resources in the implementation of ERP systems [30]. Organizational entrepreneurship refers to the process of organizational renewal (re-engineering) [22]. Reference [15] reported that there is a positive relationship between electronic business (e-business) technology, innovation, and firm performance, as adoption of new could enable process or product innovations in the adopting firm [15]. The potential benefits of e-business technologies include lower prices from suppliers, improved speed and flexibility, lower transaction costs, higher customer service levels and reduced investments in supply chain inventories [13].With regarding to strategic importance of e-business decisions to SMEs, the objective of this paper is to propose an active ERP (as an e-business technology) implementation management. This paper is structured as follows. First, Importance of SMEs in developing countries is presented. Next, the conception of innovation in SMEs is described. Then ERP implementation and critical success factors of ERP implementation are expressed. Finally, conceptual model is presented for successful implementing of ERP and promoting of innovative and entrepreneurial performance of SMEs.

2. IMPORTANCE OF SMES IN DEVELOPING COUNTRIES

Entrepreneurial opportunity can be defined as “a situation in which new goods, services, raw materials, markets and organizing methods can be introduced through the formation of new means. SMEs have been recognized as one of the instruments of growth for many nationalities; especially among developing countries. SMEs are not a homogeneous set of businesses. They vary significantly by size, age, sector, motivation, mode of organization, ethnic background, location, knowledge base, power and control of resources, innovative capacity and etc. All these characteristics can play directly on their needs and opportunities to engage with e-business [28]. SME definition according to European Commission is represented in table 1.

Table1. SME definition [9]

The growth drivers of economies such as Thailand and Vietnam are SMEs, which account for more than 95 percent of the enterprises in these countries. The important contributions of these enterprises to gross domestic product (GDP) and employment are well recognized. However, the competitiveness of these enterprises is often constrained by limited access to information and technological know-how to support the development and marketing of value-added products [7]. Thus, Government strategies in developing countries must be aimed at facilitating SME adoption of Internet enabled business processes and practices to help in advancement of national GDP. Despite the initiatives, the SMEs are still facing various levels of challenges in achieving their goals. Among the challenges faced by SMEs, particularly in

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Asian developing countries are: improving productivity and product/service quality; increasing entrepreneurial activity; encouraging innovation and technological upgrading among local firms; improving utilization of government incentives; developing human capital and encouraging smart partnerships [11].

SMEs play significant roles in Taiwan. Since these business owners often have the spirit of entrepreneurs, they are flexible and agile in operation, manifesting a strong resilience and vitality [5].

In Malaysia, SMEs contribute to their economy tremendously which includes; contribution of output (products and services); creation of jobs opportunities; developing a pool of skilled and semi-skilled workers; provide opportunities for technological development; offer an excellent ground for entrepreneurial and managerial talent. In view of the rapid development of the SMEs, the Malaysian government has initiated several facilities and initiatives to improve SMEs’ business performance [10].

SMEs in Turkey have been operating in an unstable and unfavorable macroeconomic environment for many years: there has been high inflation, a succession of deep recessions and sharp upturns (resulting in modest growth), as well as considerable exchange rate instability. The government’s economic policies and structural reform programs which were expected to work in favor of SMEs in the long run initially exacerbated the climate of instability. SMEs in Turkey comprise 99.8% of the total number of enterprises, 76.7% of the total employment. They are under- capitalized (38% of capital investment), not very efficient (26.5% of value added) and do not play a significant role in Turkey’s exports (10% by value) and only utilize 5% of bank credit [21]. It is essential for small businesses to adopt an ERP system to maintain control of their operations and to compete globally [18].

Governments are besotted with ICT and e-business. Simplistically, they see them as the keys to the knowledge-based economy and the assured competitive advantage of their economies. To meet this goal, there is mounting pressure for SMEs to more fully embrace ICT and e-business techniques because, in aggregate, they are big buyers, big sellers, big innovators and, most important politically, big employers. SMEs are considered as major economic players and a potent source of national, regional and local economic growth [28]. While SMEs are integral part of developing economies; they also face numerous challenges in implementing technologies such as ERP systems, including a lack of human and financial resources to support such initiatives [1].

3. INNOVATION IN SMES

The most fundamental feature of an innovation is that it is something new. It can be a new process, product or, following Schumpeter, a new combination. Straightforward definitions of innovations include, “putting new products and services on the market or new means of producing them”, “the economic application of a new idea”, and “the implementation of changes in production or the introduction of new types of commodities on the market”. These definitions stress an important feature of an innovation, namely that it has to be used on the market to be classified as an innovation. On the conceptual level, the adoption of new technology, such as IT, can be viewed as an enabler of process innovations from the perspective of the adopter if the implementation succeeds, the routines are changed, and the new system is actually utilized. Adopted technology can also act as an enabler of product or service innovations from the perspective of the adopter if it is successfully used to offer a new service or to deliver products to customers in a way that is new to the enterprise. For example, a company that adopts and implements new online shop software usually changes the routine of how incoming orders are processed. This is a process innovation. Furthermore, the new online shop software may allow the firm to deliver its products to customers in a new

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way or to offer additional services, such as tracking orders online or getting immediate information about availability. This would be a service innovation. Both types of innovations (process and product/service) have clear economic implications. In micro-economic terms, a product innovation corresponds to the generation of a new production function, which includes the possibility to differentiate an existing product. A process innovation, on the other hand, can be viewed as an outward shift of an existing supply function, which corresponds to lower variable costs in the production of an existing product or service, and is therefore a productivity increase [15].

SMEs look for the innovation to become more competitive and Cooperation with larger companies within supply and outsourcing networks is increasingly important for the innovation process in SMEs [6]. Encouraging innovation in SMEs remains at the heart of policy initiatives for stimulating economic development at the local, regional, national and European levels [8].

4. ERP IMPLEMENTATION

ERP is a process of innovation that enhances data processing, distribution, and service standards via the employment of new methods, hardware, software, and human resources. An ERP system, implemented across an organization, affects almost all the business processes of that organization [18]. In an enterprise context, the main aim of ERP system is to provide information to/from finance, accounting, sales, marketing, planning, production, purchasing, human resource, logistics and distribution so that the entire organization process from receiving a customer order, to manufacturing, and final delivery is structurally and systematically handled by the system. Managing uncertainty effectively and efficiently requires a well balanced planning and control because one must understand which uncertainty to tackle and how to tackle it in order to get the maximum improvement to the system. SMEs usually apply fire-fighting techniques to deal with uncertainty. This implies that they do not manage uncertainty systematically and hence do not prepare themselves for the future if the same uncertainty recurs [16].

The idea behind ERP is that the software needs to communicate across functions’’ and that ERP systems permit efficient exchange of relevant data regarding the production processes and their associated administrative tasks [23]. ERP system concludes five parts: material management, plan and produce, sell and design of order, financial/cost management. The whole process from customer, commercial flow, work plan, warehouse, and purchase to supplier is implemented less than 1 day based on ERP system which greatly increased the response speed and accuracy. Organizational culture affects an organization’s shared beliefs, ideologies, and norms that influence organizational behavior, and therefore plays a critical part in ERP implementing [14]. Besides, ERP requires high computer self-efficacy among employees because organizational changes resulted by the ERP implementation require a large-scale use of computers which presents different learning process for different types of organizations [29]. Reference [3] discuses that financial accounting and control, purchasing and material management, sales management production planning and control, distribution and logistics are the Major modules of ERP implementation [3].

Reference [17] investigated critical management issues in ERP implementation projects among 20 Canadian organizations; they studied selection criteria (ERP vendor, project manager and implementation partners), constitution of project team, project planning, training, infrastructure development, on-going project management, quality assurance and stabilization of ERP [17].

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Reference [24] compared the stages of an ERP implementation and identified five stages: (1) ERP design; (2) ERP implementation; (3) ERP stabilization/resurfacing; (4) continuous improvement; (5) transformation. Activities observed for the stabilization stage are typically operational optimization. During the continuous improvement stage, firms focus on implementing adding functionality such as bar coding, EDI, sales automation and generating significant operating benefits. Finally, in the transformation stage, this aims to gain increased agility, organizational visibility and customer responsiveness [24]. Reference [23] proposes that ERP implementation follows six-stages or phases, viz. initiation, adoption, adaptation, acceptance, reutilization and infusion [23]. The six-stage model and the associated issues in each of the six-stages are shown in Figure 1.

Figure 1. ERP Implementation Model [23]

ERP systems permit efficient exchange of relevant data regarding the production processes and their associated administrative tasks [23].

Reference [17] present major obstacles that companies faced in the ERP implementation projects such as problems in transition to new systems (data migration), unavailability of skilled people, high turnover of key project persons, cost escalations and difficulties in estimating the project requirements. The risks of ERP implementation, which involve both technical and social uncertainties, must to be effectively managed. By actively managing ERP implementation, managers can improve their flexibility, take appropriate action to respond to the often-changing ERP environment, and achieve a more successful ERP implementation [29].

Reference [30] that ERP implementation quality (the technological aspect) consisting of project management and system configuration, organizational readiness (the organizational aspect) consisting of leadership involvement and organizational fit, and external support (the environmental aspect) will positively affect the post-implementation success of ERP [30]. Traps in ERP projects include: Lack of re-engineering before ERP project Lack of project planning, Gap in the requirement definition, Under-estimation of the importance of the choice ERP, Specific software development, too much customization, Lack of training, Lack of planning post-go-live, gap in stabilization phase management Lack of communication and implication of the management, Under-estimation of data-migration risk. It emerges that the

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major trap is linked with business process definition or re-engineering [3]. Traps in ERP projects are presented in Table 2.

Traps with ERP as a tool Traps with ERP as an enterprise model

- Too much customization - Lack of training

- Under-estimated work and weak planning method

- Lack of planning post-go-live, lack of stabilization phase

- Lack of communication and implication of the management

- Lack of business process re-engineering (BPR) before project

- Confusions between ERP, BPR and management ERP choice before/after BPR, change management

- Under-estimation of the importance of the choice ERP

Table2. Traps in ERP projects [3]

The ERP systems are both an IT innovation and also a business process reengineering (BPR) mechanism. hence, they enable organizations to practice new forms of industrial engineering, a shift away from the traditional forms where IT functioned independent of the business objectives [23]. Therefore, Investment in ERP systems is an important strategy that enables businesses to achieve competitive advantages and provide good quality of service.

5. CRITICAL SUCCESS FACTORS (CSFS) OF ERP IMPLEMENTATION

Reference [4] defines CSFs in IS as “the few key areas of activity in which favorable results are absolutely necessary for a particular manager to reach his goals” [4]. By identifying relevant CSFs for SMEs, managers can better prioritize implementation efforts and resources to maximize success of ERP implementations. CSFs of ERP implementation are listed below:

- Operational process discipline. Inconsistent operational processes conflict with the

procedural rigidity of ERP. Where such inconsistency exists, it may be necessary to carry out some process benchmarking and improvement prior to enforcing standardized procedures brought in by the ERP. Best implementations involve reengineering processes before rather than after the ERP introduction. Operational process discipline should be identified as a major CSF for ERP introduction at SMEs, especially given their frequently informal type of environment.

- Small internal team. Successful companies had implementation teams that were smaller in

size than the teams at unsuccessful companies. First, larger teams tended to stay more isolated, as the impression of having complete horizontal expertise appeared to limit their interest in asking for input from outside users. In contrast, smaller teams sought user assistance regularly as they lacked expertise in certain areas. Second, larger teams had more difficulty in reaching consensus, and at times had conflicts among department representatives. Smaller teams would be more able to focus and compromise on what seemed best for the organization. Third, each of the two larger teams had at least one unreliable member that did not complete tasks, which negatively affected the project. The smaller teams suggested that a “sense of ownership” helped to give priority to project tasks whenever possible. Finally, larger teams appeared more difficult to manage by either the external consultant or the internal leader, which increased coordination costs. In summary, it appears that using larger teams based on representation from each department was negatively associated with implementation time, quality, and cost at SMEs.

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- Project management capabilities. These capabilities involved documentation and

leadership to plan and control project tasks, responsibilities, and deadlines. In the often chaotic environment of SMEs, formal documentation helped to ensure that tasks and deadlines were not missed. Interestingly, implementation success appeared to be directly associated to who was the project leader: companies having external consultants at the helm appeared to achieve greater success, as consultants often had more relevant project management experience than internal leaders. Given that internal leaders often had to carry on with regular (functional) duties in parallel to the project, it did not look surprising that tasks such as project documenting might slip down their priority list, significantly affecting the project. In conclusion, the SME success with ERP implementations appeared to be associated to (1) assigning project management responsibility to the external consultant, and (2) continually reviewing and revising documents during the implementation.

- External end user training. Training is defined as software specific instruction, and

education as general skill-upgrading. The consultant was able to tailor the instruction based on business knowledge acquired by working with the internal team. SMEs might particularly benefit by end user training that was conducted by an external consultant due to lack of expertise or time of internal team members.

- Management support. Factors that they associated with management support include

financial backing, encouragement, and alleviating team members from regular responsibilities. Financial support was often defined in terms of adequate funding for consulting and training. SMEs typically lacked technical expertise.

- Qualified consultant. Project success appeared to be directly associated to the quality of the

consultant. Project teams relied heavily on external consultants because teams lacked software expertise and time. The quality of a consultant assessed by attributes including business understanding, software knowledge, and soft skills. Thus, consultants should be able to match business process and software capabilities [26]. The factors are summarized in Table 3.

Factor Rationale Operational process

discipline

Inconsistent operational processes conflict with the procedural rigidity of ERP

Small internal team A team of less than five inherently interacts with end users,

reaches consensus quickly, creates a sense of project ownership, and reduces administration and coordination costs.

Project management capabilities

Internal project leaders are frequently distracted by regular tasks, limiting their time to prepare critical project documentation.

External end user training

Internal project teams often lack time and skill to preparing and delivering effective training sessions.

Management support

In the close-knit SME work environment, Encouraging employees positively towards the project is just as important as providing sufficient resources.

Qualified consultant Internal project teams may depend heavily on external

consultants, their technical expertise and soft skills.

Table3. Critical success factors of ERP system implementation [26]

Reference [13] examines how firm-level strategic resources, such as purchasing teams, influence the exploitation of e-business technologies and the relationship between e-business technology use and firm performance [13]. Other CSFs of ERP implementation include user participation and involvement in systems development, assessment of business needs, processes during the analysis phase of the project, the level of data integration designed into the system [20], detailed formal plan with well defined tasks, Time budget, manageable workload, Teamwork and team composition, Incentives for success, Problem solving cooperation with vendors, Culture of shared values, ERP as top priority, Top management

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support with bonuses tied to Success, Management communication, education and Expectations, Minimum customization and willingness to adapt business processes, Choosing the right systems functionality and links to legacy systems [19].

6. DEVELOPMENT OF THE CONCEPTUAL MODEL

SMEs that implemented ERP systems have made improvements in cross-functional coordination and have improved business performance at various levels [23]. Reference [3] discusses that the main benefits of ERP implementation are: performance improvement, simplification and standardization of systems, increasing productivity, ease of upgrading systems, improve interactions and communications with suppliers and customers, Customer service improvement. Reduced direct operating costs, Availability of information/quickened, integration of business operations/processes, Financial flows control, Improved lead-time information response time, gain strategic advantage), response to market evolution [3]. Firms which invest in ERP show “higher performance across a wide variety of financial metrics” [12]. The creation and implementation of an e-business project is inextricably linked to the management of Change. This requires systematic attention to learning processes, organizational culture, and technology infrastructure people and systems thinking [2]. Considering the above mentioned, figure 2 shows conceptual model of successful and active ERP implementation in SMEs and promoting of Innovative and entrepreneurial performance:

Figure1. Conceptual Model of Successful implementing of ERP and promoting of innovative and entrepreneurial performance of SME

Critical success factors of ERP system implementation:

- ERP as top priority (ERP tied to business plan)

- Operational process discipline - Teamwork and team composition (for example, purchasing teams)

- Project management capabilities - External end-user training

- User participation and involvement in systems development

- Management support (Top management support with bonuses tied to Success)

- Assessment of business needs - level of data integration designed into the system

- Qualified consultant

- Detailed formal plan with well defined tasks

- Time budget and Manageable workload - Incentives for success

- Problem solving cooperation with vendors

- Culture of shared values

- Management communication education and Expectations

- Minimum customization and willingness to adapt business processes - Choosing the right systems functionality

- Links to legacy systems

Continuous Learning culture Innovative and entrepreneurial performance of SME ERP Benefits:

- Simplification and standardization of systems

- Reduced direct operating costs - Availability of information/quickened - Integration of business operations/processes - Management of change - Cross-functional coordination - Improved lead-time - Improve interactions and communications with suppliers and customers

- Response to market evolution - improving customer services. - Improve flexibility

- Increase productivity - Higher financial performance - Strategic advantage Successful use of ERP System as an e-business technology Cooperation with larger companies within supply and outsourcing networks

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SEPTEMBER 2011 VOL 3,NO 5 7. CONCLUSIONS

This paper has presented a conceptual model of implement and development of ERP technology that SMEs can use to in order to promote Innovative and entrepreneurial performance. SMEs play a very crucial role to the economies of most developing countries from the viewpoint of generating employment and economic growth. By considering the emerging role of ERP as a competitive strategy and a technological innovation process in SMEs, via actively managing and implementation of ERP, managers can improve their flexibility, take appropriate action to respond to the often-changing ERP environment, and achieve a more successful ERP implementation. E-business must be a necessity, commitment is a critical success factor in all firms, but in the context of the Web economy, it necessitates being committed to continuous innovation and reinvention of the firm’s business strategy (organizational entrepreneurship). The optimization (or efficient use) of such information systems is nowadays becoming a major factor for firms striving to reach their performance objectives.

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