Anda di halaman 1dari 28


The Effectiveness of ERP Implementation in

Manufacturing Industries

Report submitted in accordance with the requirements of the Universiti Teknikal

Malaysia Melaka for the Bachelors Degree in Manufacturing Engineering
(Manufacturing Management)


Mohd Iqwan Rizal Bin Embong @ Shamsudin

Faculty of Manufacturing Engineering

April 2008

The purpose of this study is to discuss about the effectiveness of ERP implementation in
manufacturing industries. This study covers the definition, benefits and the
implementation steps of lean tools and techniques. The data collections were divided
into primary and secondary data. To run this study, a survey was conducted where the
questionnaire have been distributed to the manufacturing companies. The survey
consists of respondent and company detail, ERP implementation and reason of not
implementing ERP. The data obtained were analyzed using the SPSS programming. The
analysis shows that ERP implementation has the effectiveness in manufacturing

Keywords: ERP effectiveness, survey, SPSS programming


Tujuan kajian ini adalah membincangkan mengenai keberkesanan sistem ERP yang
telah diaplikasikan dalam industri pembuatan. Kajian ini merangkumi definisi, faedah
dan langkah-langkah perlaksanaannya. Pengumpulan data terbahagi kepada dua iaitu
data primer dan data sekunder. Untuk menjayakan kajian ini, satu kaji selidik telah
dijalankan di mana borang soal selidik telah disediakan dan di hantar kepada syarikat-
syarikat pembuatan. Kaji selidik ini merangkumi maklumat mengenai syarikat dan
responden, aplikasi sistem ERP dan keberkesanannya, dan sebab-sebab tidak
melaksanakan sistem ini. Maklumat yang diperolehi kemudiannya dianalisis
menggunakan perisian SPSS. Daripada analisis yang dijalankan, menunjukkan bahawa
perlaksanaan sistem ini mempunyai keberkesanannya di dalam industri pembuatan.

Kata kunci: Keberkesanan ERP, Kajian, Program SPSS


1.1 Background of Study

Organizations today are constantly in search for ways to achieve better business
performance and sustain competitive advantages through effective deployment of
resources and business processes. To stay competitive in global market, the
manufacturing sector needs to improve productivity through upgrading of its
primary production technology. Technology can improve overall productivity in
different ways through an efficient planning and control system that
synchronizes planning of all processes across the organization. Manufacturing
firms must achieve a degree of innovative capability in managing a solid
information system and on-going changes in supply chain needs in order to gain
the advantages on competitiveness world.

Through a solid information business system, Enterprise Resource Planning

attempts to integrate all departments and functions across a company into a
single computer system that can serve all those different departments particular
needs like true Enterprise Resource Planning software. For example, a firm could
have separate systems for purchasing, order management, human resources, and
accounting, each of which would maintain a separate data source. Enterprise
Resource Planning (ERP) is a system that can integrate these into a single
Companies strategy usually involve reorganization the internal operations,
upgrade plant productivity, improving product quality, and reducing
manufacturing costs, but companies nowadays are focusing on supply chain
strategies as the next planning in organizational excellence. A supply chain is a
system of organizations, people, technology, activities, information and
resources that related with each other in moving a product or service from the
supplier to the consumer. An ERP system could potentially enhance precision
across the supply chain strategy by eliminating information barrier and increase
information rate by reducing information delays. Hence, there is a reason to
believe that ERP used could be related with major gains in supply chain

ERP is the next step in a companys evaluation that began with Material
Requirements Planning and evolved into Manufacturing Resource Planning.
Material Requirements Planning (MRP) is well knows as a software based on
planning a production process and a system which control the inventory that used
to manage manufacturing processes. Meanwhile, Manufacturing Resource
Planning (MRP II) is a method for an effective planning system of all resources
of a manufacturing company. ERP is a MRP foundation like MRP II and
represents as an extended effort that integrate standardized record keeping that
will permit information sharing among different areas of an organization in order
to manage the system more efficiently.

After the computers began to apply in materials planning for the production, ERP
have become the current evolution of a progression of planning tools (Michael D.
Okrent, 2006). ERP system works essentially by integrating the whole business
information, allowing organizations to manage effectively their resource of
people, materials, and finance (Markus et al, 2000). The overall resources of an
enterprise can be planned, managed and integrated through ERP (Ching Chow
Yang, 2006).

In generally, ERP can be applied to finance, human resources, manufacturing

and logistic, supply chain management, and data analysis or throughout the
organizational departments. (Wen Tsaan Lin et al 2006).

This chapter provides an overview of the research project titled an effectiveness

of Enterprise Resources Planning (ERP) system in Manufacturing Industry. The
following overview of chapter will state out the effectiveness of ERP system
involve the product itself and its implementations throughout the organization.

1.2 Problem Statement

To achieve the goal of an organization, various functions such as purchasing,

production, sales, human resources, finance, and accounting must work together
to integrate the complex system of manufacturing organizations. It is critical for
companies to figure out their ways of doing business whether it will fit with a
standard ERP package before the checks are signed and the implementations
begin. This study also related with the following research problems:

a. Current demand on ERP implementation is growing fast, but only a few

story of its effectiveness had been told out and relatively few success
stories (AMR Research, 1999).
b. The implementation of ERP is different compare to traditional
information system (Chin Fu Ho, 2004). A lot of effort needs to change
on system analysis and design in the software in ERP system but system
implementation is a challenging management issues (Holland and Light,
c. Organizations performance indicators and the implementation of the new
technologies will create misalignment in the interaction between
important influence of new technology (ERP Effectiveness) on tasks and
efficiency indicators, combined with the actual impact on an organization
(Leonard-Barton 1988).
d. There are a lot of studies about impact of ERP system using interviews,
case studies, and industry survey but relatively few reported on
substantial performance improvement in several areas of ERP system,
such as the ability to provide real time information to customers, shorter
production cycle, and on time completion rates (Shih Wen Chien, 2007).

Therefore to provide solutions for the above problems, it is important to find out
all the effectiveness of ERP system in manufacturing industry include with its
disadvantages so that this study will meet the requirements and satisfaction to the
companies involved.

1.3 Study Objectives

In order to solve above mentioned problems, this study tries to achieve the
following objectives:

a) To evaluate the effectiveness of ERP system through various companies.

In order to evaluate the effectiveness, a survey will be conducted in
various companies. Questionnaire will be distributed in order to
determine the needs of the workers.

b) To determine the disadvantages of ERP system through various

companies. In order to complete the study on the effectiveness, it should
be compared with the disadvantages to create aware on the uses of ERP.
The questionnaire will be included with company current experience
using ERP system along its difficulties.

1.4 Scope and Limitation of Study

The study is focus on organization performances after implements an ERP

system on their way of business. An effectiveness of the ERP system will be
stated out troughs questionnaire in order to complete the study objectives on ERP
system. Questionnaire will be submitted on various kind of business in
manufacturing industry that implement ERP system on their way of business.
Nevertheless, the disadvantages of ERP system also will be study to compare the
effectiveness on various organizations.

Limited organization will be selected in order to complete the questionnaire

because of the focus on effectiveness is to general. Only several factors such as
managements system, ERP software, and supply chain managements
implementations (as example) that involve only selected companies will be

In order to find out the effectiveness of the ERP system in the manufacturing
industries, only one method will be used to gather the information which is
statistical survey through the questionnaire form that been submitted to the

1.5 Potential Benefits of Study

This study will give benefits to the industry and also the researcher by:
a) The findings on the effectiveness of ERP system can be used by the
industries to improve their current ERP software.

b) As a reference for academic studies related to ERP system in

manufacturing approach.

c) Create awareness of advantages on implementing ERP system on various


1.6 Report Outline

This study is divided into five (5) chapters. Chapter 1 is generally about the
introduction which consists of problem statements, objectives, scope and
limitations of study, potential benefits of study and the study outlines. Chapter 2
is the literature review. Based on the reference gathered, this chapter will state
out the effectiveness of ERP system as well as the definition and the introduction
to the key words which are ERP, MRP, ERP software, SPSS program and
manufacturing industries.

Chapter 3 is about the methodology. In this chapter, it discussed the

methodologies that were used to gather the data required to support the
development and analysis of the study. Chapter 4 discussed about the results of
the questionnaire, where the data research about the effectiveness of ERP system
will be analyses using the SPSS program. The data required in order determining
the used of ERP, the effectiveness and also the disadvantages will be observed.
In chapter 5, conclusion and recommendation will be discussed as a development
of the study on the evaluation of the effectiveness of the ERP system.
1.7 Report Structure
Chapter 1 Evaluate the problems from the
study, and determine objectives and
scope covered from the study

Discuss about literature review that

Chapter 2 equivalent to the title of the study
and past research equivalent with the

Discuss about methodology and

Chapter 3 approach that been used from
beginning to the end of the study

Provides results and data from the

questionnaire that been done.
Results will be analyses and
Chapter 4
discusses includes the advantages
and disadvantages of ERP system
in organizations

Conclusion and recommendation

Chapter 5
from the study that been done.

Figure 1.7: Report Structure


2.1 Introduction

This chapter will discuss about Enterprise Resource Planning (ERP) successful
performance in manufacturing industries. Facts and findings on previous
research in and outside the country that relevant with the problems will be
discussed in order to support or to make comparison on objective of study. This
chapter also discusses about the past studies related to the project title with the
authors, titled of the study and the findings of the studies will be discovered.

2.2 Manufacturing Industries

Manufacturing means that a process of transformed raw materials into a finished

goods (Kalpakjian and Schmid, 2006). Manufacturing involve in manufactured
product where a human activity is a part in order to produce other products.
Manufacturing is usually intended for making a mass production of products for
sale to customer in order to gain profit. The effect of level manufacturing activity
is critical where it can determine the standard of living of its people (Kalpakjian
and Schmid, 2006).

The word manufacturing comes from the Latin word, manu factus, and it is
means making by hand or use a hand to make a thing. The use of word
manufacture is found in 1567 and continue by manufacturing in the year of
1683 (Kalpakjian and Schmid, 2006).

Enterprise Resource Planning (ERP) system is important in manufacturing

industry. It changes the operational planning tools and combined it with the
traditional planning. Also, combination of manufacturing activities and other
business functions in manufactured company will produce a new overall ERP

Various manufacture products typically require several modules in the process

that need to be implemented and integrated into a different system strategies. The
uses of process mapping is important to guide through overall process activities
in manufacture organizations.

Ideally, ERP delivers a single database that contains all data for the software
modules that being implement in various kind of business in manufacturing,
which would include all the key business processes.

2.3 Enterprise resource Planning (ERP)

2.3.1 History of ERP

ERP is a recent trend in the business today. The expansion of ERP
software starts in the year 1990's. However, it has been within the last
five years that ERP has really in use and seen record revenues by the
software companies. In the past, ERP software was used to figure a
critical situation and schedule manufacturing processes (Anon, 2007 a).

ERP come out with the evolution of Manufacturing Requirements

Planning (MRP) II. From business perspective, ERP has expanded from
coordination of manufacturing processes to the integration of enterprise
wide processes. From technological aspect, ERP has evolved from legacy
implementation to more flexible tiered client server architecture (Chin Fu
ho et al. 2004).

The following table 2.3.1 summarizes the evolution of ERP from 1960s
to 1990s:


Inventory Management and control is

the combination of information
technology and business processes of
maintaining the appropriate level of
stock in a warehouse. The activities of
inventory management include
1960s Management &
identifying inventory requirements,
setting targets, providing
replenishment techniques and options,
monitoring item usages, reconciling
the inventory balances, and reporting
inventory status.
Materials Requirement Planning
(MRP) utilizes software applications
for scheduling production processes.
MRP generates schedules for the
Material operations and raw material purchases
Requirement based on the production requirements
1970s Planning (MRP) of finished goods, the structure of the
production system, the current
inventories levels and the lot sizing
procedure for each operation (Michael
D. Okrent et al. 2004).

Manufacturing Requirements Planning

or MRP utilizes software applications
for coordinating manufacturing
1980s processes, from product planning,
Planning (MRP
parts purchasing, inventory control to
product distribution (Michael D.
Okrent et al. 2004).
Enterprise Resource Planning or ERP
uses multi-module application
software for improving the
performance of the internal business
processes. ERP systems often
integrate business activities across
functional departments, from product
1990s Resource
planning, parts purchasing, inventory
Planning (ERP)
control, product distribution,
fulfillment, to order tracking. ERP
software systems may include
application modules for supporting
marketing, finance, accounting and
human resources.

Table 2.3.1: Evolution of Enterprise Resource Planning

Today in the year of technology demand, ERP is the foundation of

businesses domestically and globally. It is used as a management tool and
gives organizations a great competitive advantage. ERP has been
recorded so successfully because companies are using ERP to modify its
business processes after the Y2K problem. It is believed that the Y2K
agreement issue and the requirement are successful to advance a more
productive and efficient work environment in various manufacturing
industry after implement the ERP system.
2.3.2 Theory of ERP

Enterprise Resource Planning system is works by integrating the whole

business information, allowing organizations to manage effectively their
resources of people, materials, and finance (Markus et al., 2000).

Integrating these business practices allows different areas of the company

to communicate with each other by the click of the mouse. ERP also
implements and automates business processes, putting them into a useful
format that been standardized across the organization. If ERP is been
used correctly, it can be an effective management tool. The system will
allows managers from all departments to look vertically and horizontally
across the organization to see what process are accomplishing or not
accomplishing. ERP systems recorded data about historical activity,
current operations and future plans and organize it into information that
people can use to help derive business strategies.

In the manufacturing industry, ERP systems act as the 4M's method

which are Man, Money, Materials and Machines (Kalpakjian and
Schmid, 2006). This ERP system will integrate these four aspects of
business together, and provide a potential value to the company.

2.3.3 Definition of ERP

Enterprise Resource Planning systems can be defined as a unified system

database for the various system modules that all data and processes
within organizations had been integrated by using multiple components
of computer software and hardware in order to achieve the integration.

It is also a software solution that addresses the enterprise needs taking the
process view of an organization, and in term of industry Enterprise
Resource Planning is a set of activities that support by multi-module
application software that help a manufacturer or other business manage
the all the parts of its business.

This bill of material processor can give an opportunity to the

communications between previously different groups into a single entity
with a common understanding of the product to be produced (Robert J
Vokurka et al, 2004).

Enterprise Resource Planning system works essentially at integrating the

whole business information, allowing organizations to manage effectively
their resource of people, materials, and finance (Markus et al, 2000). The
overall resources of an enterprise can be planned, managed and integrated
through ERP (Ching Chow Yang et al., 2006). In generally ERP can be
applied to finance, human resources, manufacturing and logistic, supply
chain management, and data analysis (Wen Tsaan Lin et al., 2006).

Enterprise Resource Planning systems are complex to be defined and

dispersed within and between organizations where in a sense the ERP
system are elusive in other meanings the system are in constant flux and
to be found everywhere and nowhere (Shih-Wen Chien et al., 2007).

2.3.4 Importance of ERP

The benefits of implementing an Enterprise Resource Planning system

are endless. First and most important, all ERP systems are focused on the
customer and end results. This means better products and services
produced and delivered quickly. ERP allows open communication among
suppliers, vendors, customers and all other facets of the business.
Second, ERP can put a company with a standard set of business practices
across the whole organization. By doing this, it allows each department
within the whole organization to operate in the same way. Each
department whether in Malaysia, China or other continent will hire the
same, order the same and run the operation with a same style according to
business needs.

Various aspect of ERP implementation can be study academically

intended to record the impact of ERP system and the challenges of the
implementation project itself. The reason for implementation is based on
the organizational inclinations and regarding to change where the focus
of implementing the ERP is mainly on the realization for the functions or
importance in the ERP system.

Enterprise Resource Planning also can improve business performance to

the organizations by implement an efficient planning and control system
that synchronizes planning of all processes through organizations (Shih-
Wen Chien et al., 2007). Solid information systems (IS) are required to
competitiveness business that it will aligned with business processes.
ERP system can give valuable information as well as enhance operating
efficiency by changing the company strategies from developing in-house
information system to purchasing application software (Shih-Wen Chien
et al., 2007).

Enterprise Resource Planning can streamline the business operations and

play a role as a key of successful ingredient to gain competitive
advantages within the organizations (Zuckerman et al,. 1999).

The systems also can help companies by integrating their business

functions into a unified and integrated business process. It will create
excellent if companies implement more enterprise based systems
throughout their organizations (Ike C. Ehie et al. 2005).
In summary, ERP application can help organizations in various ways of
business aspect. The common importance of ERP that can be conclude
are it helps in reduction of organizations operating cost can be reduced,
integrates all parts of an organization, increases the efficiency of
operations as a result of the integration, integration on information
systems which enables free flow connection of information across the
organization and enables consolidation of different software within the

2.3.5 Disadvantages of ERP

There are several disadvantages of Enterprise Resource Planning that can

be discussed in this study. The disadvantages of ERP are important to
create a comparison between the advantages in order to show the
significant differences occurred before and after the implementation of
the system. First is time consuming, followed by expensive, conformity
of the modules, and features and complexity.

Time consuming

ERP implementation is longer and can take from six months to several
years to complete. The ERP software functions itself will usually be
available in used approximately in every six month (Michael D. Okrent et
al 2004). Companies that install ERP do not have an easy time to gain the
benefits of it. Companies usually will change their ways of business and
the ways people do their job after implement the ERP system and this
will take times. The important thing is not to focus on how long it will
take. It is effective to understand the potential benefits and how to use
wisely the system in order to improve the business itself because ERP
implementation will take almost between one to three years in average
(Stevenson, 2007).

ERP are expensive to implements. The price includes with general

information technology (IT) infrastructure (Michael D. Okrent et al
2004). Cost may be change from thousand dollars to millions and the
business process reengineering cost in infrastructure may be extremely
high and create result in budget overrun. It is include with the hidden cost
of ERP implementation that usually a company will face in the following
areas (Stevenson, 2007):

1. Training

Training fees for the workers are high because of difficulties of

implementing complex as ERP.

2. Integration and testing

Hidden cost in ERP such as testing the links between ERP package
and other corporate software links.

3. Data conversion

Data conversion like moving the corporate information such as

customers and supplier record, products design data, and etc. will
costs money.

4. Data analysis

For an analysis purpose, the data from the ERP system must be
combined with the data from external systems. This will charge as the
cost of a data warehouse in the ERP budget.
5. Consultants

Consulting fees will be charges and usually become higher if it

involve outside consulting firm besides of own vendors consultant.

Conformity of the modules

The architecture and components of the selected system should conform

to the business processes, culture and strategic goals of the organization.
A one reason for ERP implementation to fail is the software itself does
not fix the one of important business processes for a company
(Stevenson, 2007).

Features and complexity

ERP systems are not easy to be defined and are complex and dispersed
within and between organizations because of its system modules and
complexity of implementation. Each of the position involves in ERP
system in organizations said that these system are elusive where the
system itself are in constant instability (Koes Boersma et al. 2005).
Nowadays, some of the mid average companies having difficulty on the
performance of ERP system that cause them lack of effective evaluation
features and models of the system (Shih Wen Chien et al. 2007). ERP
system may have too many features and modules so the user needs to
consider carefully and implement the needful only.
2.4 ERP Modules




Materials) CONTROL



Figure 2.4: Figure of Modules involve on ERP implementation

Figure 2.4 shows an example of the modules that help ERP implementation in
the organizations. These following modules will be discussed in term of its
definition, description and the relationship with ERP system.

2.4.1 Material Requirements Planning

MRP Systems were first been used by George Plossl and Joseph Orlicky
in the late 1960s. Material Requirements Planning (MRP) is software
based on planning a production process and a system which controls the
inventory that used to manage manufacturing processes. An MRP system
is used to meet three objectives which are to maintain the lowest possible
level of inventory and to plan manufacturing activities, delivery
schedules and purchasing activities and lastly to ensure materials and
products are available for production and delivery to customers .

Companies need to control the types and quantities of materials which

they purchase, plan which products are to be produced and in what
quantities then ensure that they are able to meet current and future
customer demand, all at the lowest possible cost. MRP is used by many
organizations as a tool to deal with these problems. This applies to items
that are bought in that go into more complex items.

2.4.2 Bill of Materials (BOM)

A bill of materials (BOM) is used to describe the parts list of components

such as screw, bolt and nut that needed to complete a profitable product.
BOMs are listed in hierarchical order with the top level representing the
sub-assembly or end-item. The BOMs that describe the sub-assemblies
are referred as a Modular BOMs. Modular Bill of Material (BOM) is a
vital part that defines the product structure for an end-item. It also defines
the parts, documents, component materials, and engineering drawings in
order to complete a sub-assembly.

Besides sub-assemblies, a BOM also can define products in the

Engineering Bill of Material which called designed product or in the
Sales BOM as they are ordered, Manufacturing bill of material as they are
built in the industry, and as they are maintained which is Service BOM.
These different types of bills of materials are depending on the business
need and use which they are intended to use that are available in the ERP
system features.

2.4.3 Purchasing

Purchasing is defined as a business or organization attempt to purchase

goods or services in order to achieve the goals for the enterprise.
Although there are several organizations attempt to set standards in the
purchasing process, it will create greatly different between the
2.4.4 Logistic

Logistics acts as a managing system that control the flow of goods,

energy, information and other resources like products, services, and
people, from the source of production to the marketplace in order to meet
the requirements of consumers. Logistics management contribute to the
supply chain system which plans, implements and controls the efficient,
effective forward and reverse flow and storage of goods, services and
related information between the point of origin and the point of

2.5 ERP Implementation

2.5.1 SAP/R3

SAP R/3 is a well known client server based application, that utilizing
using a three tiered model. It includes a presentation layer for a client that
can connect with the user. The application of this layer houses include
integrate all the business-specific logic and the database layer records as
well as storing the information about the system including transactional
and configuration data (Anon, 2007 b)

The SAP/R3 can be used either alone or combined to form business

solutions. It functionally suitable for all kind of standard business of all
enterprise includes manufacturing firms (Y. Yusuf et al. 2004).
Figure 2.5.1: SAP product implementation process data diagram.

Figure 2.5.1 shows the example of one product implementation of

process project plan. The SAP implementation process is made up out of
four main phases which are:

First phase: The project preparation where a vision of the future-state of

the SAP solution is being created.
Second phase: A sizing and blueprinting phase where the solution stack is
created and training is being performed.

Third phase: A functional development phase.

Fourth phase: A final preparation phase include with the last tests are
being performed before the actual go live.

For each phase, the vital activities are addressed and the deliverables or
products are explained. The process-data diagram above, gives an
overview of all of these activities or processes and deliverables. The four
gray boxes depict the four main implementation phases, which each
contain several processes that are in this case all sequential. The boxes at
the right under the SAP implementation project plan show all the
deliverables and concepts that result from the processes. Boxes without a
shadow have no further sub-concepts. Boxes with a black shadow depict
complex closed concepts. Boxes with a white shadow depict open closed
concepts, where the sub-concepts are expanded in greater detail. The
lines with diamonds show a relationship between concepts (Anon, 2007

2.5.2 SAP R/3 implementation on Rolls-Royce

Rolls-Royce before ERP (Y. Yusuf et al. 2004)

Rolls-Royce used over 1500 systems before the ERP project was started
and many of the system was developed internally by Rolls-Royce itself
over the last two decades.

These legacy systems were expensive to operate and difficult to maintain

or develop. They did not provide accurate, consistent and accessible data
that was required for good and timely decision-making. The major
concern is about the lack of performance assessment such as delivery
performance, and quality metrics.

These old tradition systems can not relate themselves fully to a modern
manufacturing environment. Some of the legacy systems were so old and
the problem of the year 2000 compliance problems (Y2K) always
occurred within the organizations which results work within Rolls-Royce
functionally orientated and various departments worked in isolation.

The last major manufacturing system to be developed and implemented

by Rolls-Royce was MERLIN. The MERLIN system stands for
mechanized evaluation of resources, logistics and inventory where the
system was basically a scheduling system which ran same as MRPII
system principles.

The system was developed in the years of 1980s. Although it was capable
to handle all the process data within organizations, it was prone to manual
manipulation. The example of the system difficulties is it lack of
communication between individual sites. MERLIN often had difficulty
communicating with another manufacturing system named IBIS
(inventory based instructing system) in the Rolls-Royce Company. IBIS
was an older manufacturing system that was used at the Bristol and Ansty

Corporate cost accounting (CCA) was used to financially monitor

transactions, which covered pipeline inventory and inter-site transport.
This additional system was implements because of IBISs work in
progress was often transferred between sites and could not be tracked
accurately causing inventory and stocks take problems to be occurred.