Posted in Operations & IT Articles, Total Reads: 2560
, Published on 03 May 2014
SME sector in India forms the backbone of Indian economy with about 45% contribution to industrial output, 40% of exports, employing 60 million people and creating 1.3 million jobs every year. The count of SMEs in India stands at 30 million and annual growth rate is at 8%. The SME sector has seen tremendous growth resulting from various factors such as government aid measures in form of trade portals & trade directories, funding from local and foreign investors and introduction of new technologies. One such technological advancement in this field is implementation of ERP. With government planning to expand its presence in international markets, the sector is all set to face fierce competition. Seeing this competitive environment, there has to be much greater interaction between business units and the customers. ERP systems thus act as strategic tools which integrate and synchronize the isolated functions into streamlined business processes. The essence of ERP lays in the premise that whole being greater than sum of its parts.
Image COurtesy: freedigitalphotos.net, wobee
ERP implementation is the finest example of inseparability of business and Information Technology. In India, ERP implementation can be followed back for more than two decades with many national programs in India supporting IT developments. In March 1995, the earliest form of ERP was launched in the form of CIM (Computer Integrated Manufacturing) systems. Early adopters of ERP system implementation were big organizations like HLL, Maruti Udyog Ltd., ONGC, Telco, Kirloskar and Godrej soaps. Initially, it was taken up by the manufacturing firms. The system implemented focused mainly on the finance and production department of big enterprises as these involved more transactional data. The prime objective was to make the information such as order entry, financial accounting, purchasing, et al readily available on the real-time and continuous basis across all units and facilities of the firm.
The ERP evolution can be spanned across three phases:
- Phase I MRP adoption (Materials Requirement Planning) – This was taken up by big firms in the manufacturing sector focusing on accounts and finance and production. It involved the amount of raw materials and intermediate products to be manufactured or ordered from vendors to meet the demands of finished products.
- Phase II MRP II (Manufacturing Resource Planning) – It included all the aspects that would impact the overall manufacturing process such as labor, machinery, set up.
- Phase III ERP (Enterprise Resource Planning) – This is adopted by every organization these days. It includes all aspects of business processes in the organization including CRM, HRM.
With government support to ERP systems’ development and since 2001, the policy of using IT technologies, to speed up industrialization, has been widely implemented in India. At the same time, several large scale national projects on IT applications in industrial enterprises have been launched. Till 2003, more than 3000 industrial enterprises, have applied ERP systems. Moreover SME as emerging market entities rise quickly, and request new ERP solutions to meet their demands, which reflect the maturity of ERP markets in India.
The improvement of Information Technology and reduced costs of computers have encouraged even the smaller organizations to implement ERP systems. On technical front the scalable relational database systems and client server technology have further eased the deployment of ERP systems. As per the survey conducted by IDC, ERP awareness among small and medium enterprises is around 30% compared to 80% among larger organizations. Implementation of ERP in larger organizations is different from that in SMEs. In larger ones, it is done for all the departments since cost is not the governing factor but in smaller ones it is done department wise on the priority basis. The deployment of ERP systems is done on the basis of:
- Number of departments in the organization
- Cost-effectiveness of ERP implementation
- Profit returns after ERP implementation
Profit returns attain the focus while deciding on the implementation of ERP systems for smaller organizations. Implementation of ERP systems in SMEs is done in stages. Here ERP is implemented only for those departments where it is felt to be absolutely necessary. Once the profit starts coming in, the ERP is extended to other departments as well.
The main driving force for ERP implementation in SME sector is achieving increased operational efficiencies, increased labor and capital productivity and a better streamlined process flow among suppliers and distributors. This provides the competitive advantage as well as quick response to dynamic market scenario. In practical scenario, when larger organizations implement ERP successfully they encourage the smaller ones associated with them, in the form of manufacturers or suppliers, to implement the same. On the similar lines, the large OEMs also pressurize SMEs to streamline their supply chain by the implementation of ERP systems. One trait that makes India a completely different platform for introducing ERP systems in organizations is variety of ownership-structure. Whether a firm is state-owned or foreign investors funded or privately-held impacts the methodology adopted in ERP implementation. Also evolution of corporate governance has its own polarization effect while implementing the ERP systems.
The implementation process for a customized package usually takes around 4 to 6 months. In addition to all the above mentioned factors, seeing from the ERP vendors’ view point, the marketing strategy adopted to implement the package is different from that which is to be provided to larger firms. It is important for a vendor to think from the SMEs point of view- to look into the business requirements, finding suitable software packages that fit the needs. While deciding the package to be implemented, it is important to examine functional fit with company’s business processes, scalability & flexibility of the software and complexity & user friendliness of the package. The other factors to be taken into consideration during the implementation process include ability of package to support multi-site planning and control, the necessity of regular update processes, customization required and local support infrastructures as these impact the cost of implementation of ERP systems. A typical process of implementation follow the below model:
Figure 1: Conceptual Model: ERP Implementation in SMEs
(Source: ERP Implementation in Indian SMEs: Issues & Challenges by P.T. Kale, S.S. Banwait, and S.C. Laroiya)
Implication & Challenges
ERP Implementation is adopted by any organization, whether big or small, for single most important reason of facilitating information sharing across the divisions simultaneously and dynamically. This in turn helps the organization to standardize the business processes, transform the organization into a single structure and work in a streamlined fashion. The whole single unit entity working in a structured format leads to the following mentioned benefits:
- Efficient planning and manufacturing time
- Reduction in manpower
- Better customer relationship
- Efficient usage of resources
- Efficient inventory management
- Faster response to dynamic markets
Apart from the quantifiable benefits, ERP systems provide soft solutions as well to the organizations such as comfort in work life, maturity in planning and transparency & visibility in the organizations. ERP when properly implemented can give far reaching results. It brings tremendous cultural and structural changes in the organization.
With most of the larger organizations implementing or already implemented ERP systems, market is saturated with this segment. Where on one side having a lot of untapped potential encourages ERP vendors to look into SMEs, there always are some challenges faced by them either in implementing or removing the wariness among the organizations to implement ERP systems. Taking into account ERP implementation in SMEs the main reasons cited by management include “ERP is too expensive” or “ERP is too complicated”. When costs are accounted for, the cost of solution and implementation cost is 1:1 globally, but in India this ratio is between 1:1.25 and 1:1.15. When ERP complexity is considered, organizations face the issue because of lack of awareness and objective clarity, weak IT infrastructure, management issues and little implementation experience. The general perception towards ERP is taken in the wrong sense - SMEs think it is an ‘IT Solution’ instead of ‘Business Solution’. A survey based on TOPSIS revealed the following issues towards ERP implementation:
Figure 2: Key issues related to ERP implementation in Indian SMEs
(Source: An approach to identify issues affecting ERP implementation in Indian SMEs in Journal of Industrial Engg & Management)
ERP systems not only provide a disciplined way of working but also transparency and accountability. The spending on ERP is increasing worldwide and is further poised to grow because of:
- Cheaper hardware and software availability
- Cheaper and faster internet
- Benefits of e-commerce
- More capable ERP systems getting introduced like business intelligence and CRM
In India, SMEs are the backbone of economy and are today faced with global competition. To empower the SME sector as the growth engine of Indian economy, it is necessary to support the SMEs, educate and empower them to make optimum utilization of the resources to achieve success. ERP is that piece which will complete the growth puzzle solution and will help India in becoming the powerhouse in international arena by improving the manufacturing practices.
This article has been authored by Yashika Singh form DMS IITD