Role of enterprise resource planning: A review of practices, trends, theory and opportunities in expanding field of research

P. Permatasari & V. Natasha

Parahyangan Catholic University, West Java, Indonesia

ABSTRACT: Since the inception of Enterprise Resource Planning (ERP) concept in 1990, many companies have started to implement ERP.

1 INTRODUCTION

The information technology has been developing rapidly in recent decades. The development of tech­nology causes the competition more rigorous. This development causes changes in the company’s accounting information system. Information is the output of an information system. Information must be useful and meaningful. The quality of information according to Romney & Steinbart (2015) includes relevant, reliable, complete, timely, understandable, verifiable, and accessible.

The latest accounting information system model continues to be found to overcome the weaknesses that exist in the previous accounting information system.

Since the inception of the ERP concept in 1990, many companies have begun to start implementing ERP. According to Hwang & Min (2013), the popu­larity of ERP continues to increase as evidenced by the increase of ERP software sales from $ 28 billion in 2006 to about $ 48 billion in 2011. More than 50% of ERP users are companies that are in the manufacturing industry.

Manufacturing companies are companies that pro­cess raw materials into intermediate goods or finished goods. Therefore, the production cycle become very important cycle for companies in the manufacturing industry. The production cycle is a set of business activities and information-processing operations related to the manufacture of a product. The activities that exist within the production cycle involve many depart­ments. Activities in the production cycle include prod­uct designing, planning and scheduling, product operation and cost accounting. In order for the produc­tion cycle to run properly, the information flowing in each activity must be qualified.

The problems that occur within the production cycle cause enormous losses to the company. Prob­lems that occur are often due to the low quality of information relating to production. According to Xu et al. (2002), ERP is implemented to minimize these problems; however, the implementation of ERP is not easy (Booth et al. 2000). Companies need to adapt to ERP software. If ERP is successfully imple­mented it can integrate all the business functions that exist within the company. ERP facilitates the flow of information both within and outside the company and improves the quality of information required in the production cycle. Therefore, the research ques­tions on this study are:

- What is the figure of production cycle in a - non- ERP manufacturing company?

- What factors affect the successful implementation of ERP?

- What is the role of ERP in company’s production cycle?

2 RESEARCH METHOD

This study use descriptive analytic method.

In this study, we used the secondary data. The data were obtained from the literatures related to the topic. The Literatures were studied in form of jour­nals, articles, books, and other sources from Indo­nesia and other countries published in last sixteen years. As many as fifty journals were used as the sources in this literature study.

The data collection technique in this study is lit­erature study. The data was analysed by using con­tent analysis. Online literature searches were conducted from the database Proquest, Emerald, Wiley, Springer, Ebsco, Sinta with the following cri­teria: (1) the year of publication of the journal was limited from 2001 to 2017, (2) the keywords used in the journal search were: “enterprise resource plan­ning” “ERP” “production” “manufacturing”, (3) abstracts in journals have conformity with the topic to be studied.

3 RESULTS AND DISCUSSION

3.1 Production cycle in non - ERP companies

The discussion in this section will be separated by the stages/activities of the manufacturing cycle.

3.1.1 Product design

According to Romney & Steinbart (2015), the pur­pose of product design activities is to produce prod­ucts that meet customer needs in terms of quality, durability, and function while minimizing production costs. The following section will discuss in detail about the problems happened in this stage.

- Improper Communication between Sales and Pro­duction Department: According to Vries & Bon- stra (2012), in creating a product design, production department (especially design sec­tions) needs to know and respond to customer’s needs in a timely manner in order to design prod­ucts that meet customer needs at the right time. During this production department has difficulty to know the needs of customers in a timely manner.

- Mistakes in Bill of Material (BOM) Preparation: According to Vries & Boonstra (2012), before a company implements ERP, there is often some mistakes in making BOM. This can be due to poor communication with sales department. The sales department only delivers the specifications as customers want to production department orally. Because of that, the production department sometimes does not understand the specifications described by the sales department, as a result, the production department misinterprets in determin­ing number and type of components to be used.

3.1.2 Planningandscheduling

According to Romney & Steinbart (2015), mistakes in determining the amount of production will cause error in deciding amount of raw materials purchased. Based on some previous studies, there are several causes of mistakes in determination of the amount of production i.e.:

- Error in Sales Forecast: According to Relich et al. (2014), prior to ERP implementation, there was significant difference between actual demand and company’s inventory. It is due to wrong estima­tion in demand forecasting. Too much production and store inventory makes losses because of high cost of storage. Excessive storage costs includes opportunity cost in cost of keeping inventories and other storage-related costs such as warehouse rental fees, insurance fees, and costs incurred due to obsolete inventory. The same finding was also expressed by Hsu and Chen. According to Hsu & Chen (2004), company had difficulties in making accurate sales forecast because the data was too much and spread in several different departments.

- Inaccurate Inventory Data: Kennerley & Neely (2001) found that many companies did not have clear and accurate information relating to their inventories.

- Lack of raw materials: Razi & Tarn (2003) sug­gested that companies should not have lack of raw materials to keep their operation well. According to Kennerley & Neely (2001), when raw materials in one department run out then the production department staff need to replace their raw materials from other production departments or warehouses. If the raw materials in are not available, then purchasing department need to order them from suppliers and further the sup­pliers need some more time to deliver the orders. All of these steps could cause late production activities.

3.1.3 Product operation

There would be some problems that occur during the production activities, i.e.:

- Production Time Delay: According to Portougal (2005), prior to implementing ERP, production scheduling is only known by production man­agers. Therefore, it could result in delay in the production process. Otis & Hampson (2017) also found that poor production scheduling will result in the production process runs slowly and costly.

- Improper inventory control: Kennerley & Neely (2001) found that before implementing ERP, companies did not have clear and accurate infor­mation about inventory. Therefore, it could result in some potential fraud related to the inventory.

3.1.4 Cost accounting

The following section will discuss more about the problems that occur related to cost accounting.

- Low Quality Data: Data is the input of an informa­tion system. When the data is not qualified then the resulting information is also not qualified. Xu et al. (2002) identified some data quality problems faced by companies, i.e. the accuracy of data: data is not objective, incomplete data, data that is not timely, too much data, too little data, and the same data are input by several different departments.

- Inaccuracy calculation of production cost: According to Muhtadi (2015), before implement­ing ERP, each department has its own format to record production cost data. It took a long time to complete the production cost calculation before it could be combined into the same format. Another problem is that personnel in one department often forget to include cost components in the calcula­tion. Employees can easily manipulate those pro­duction cost data.

- Incorrect product mix decision: Error in determin­ing product mix can be caused by inaccurate cal­culation of production cost or inaccurate actual customer demand data.

3.2 Factorsaffectingthesuccessful implementation of ERP system

According to Verville & Hallingten (2003), ERP implementation process in a company is not easy since people must adapt to ERP software. Dezdar & Ainin (2011) found that the success level of ERP implementation depends on the viewer’s perspective. In this study, we will analyse eight main factors that affect the successful ERP implementation within a company.

- Top management support: According to Al-Mudi- migh et al. (2001), top management support is the desire of top management to provide resources and support to achieve successful ERP implemen­tation. Seng Woo (2007) found that top manage­ment is important to develop vision and policy direction, to help employees find their passion and energy to run the business and implement ERP. Top management engagement becomes essential to generate adequate resources, make decisions quickly and effectively, resolve imme­diate conflicts, bring all personnel to agree on thought, build collaboration in different groups within the company.

Project Management: According to Al-Mudimigh et al. (2001), ERP implementation needs to be carefully regulated and monitored. Effective pro­ject management is needed to control the imple­mentation process, avoid excessive budget usage, and ensure that the project is completed on time. Change Management: Companies should manage the cultural and structural changes that occur as a result of implementing ERP. Company’s commit­ment to dealing with change is needed to face the problems of implementing ERP (Al-Mudimigh et. al, 2001).

Education and Training: Al Mashari et al. (2003) found that often investing millions of dollars in ERP fails because the company does not apply a good training system. The challenge faced today is to determine the best training method for end users. ERP training should be tailored to the needs of the users.

Teamwork and composition: According to Seng woo (2007), having the right composition in a team is important but difficult to achieve. Each team member must have good technological skills and understand the company’s business thor­oughly. Besides, the team should consist of a mix of cross-functional, external consultants and internal staff with the best knowledge and skills in the company (Gargeya & Brady, 2005).

Communication: Communication is an excellent tool for announcing, explaining, preparing people for change. It is also needed to build knowledge and understanding from users about the new system. Communication should be started as soon as possible (Maditinos et al. 2012). Good commu­nication should at least explain the following: an overview of the whole new system, the reason companies choose to implement the new system, changes that will occur with the new system implementation and its plan and how the new system will help simplify the business processes that take place inside the company.

Consultant Support: Maditinos (2012) found that consultants play an important role because he has knowledge and skills needed to assist the com­pany during ERP implementation process. Con­sultants need to have a high ability to solve problems faced by the company in order to make good communication with their clients.

Clear goal and objective: Upadhyay et al. (2011) found that the companies need clear plans and objectives to be able to control time limit. Besides, having vision, mission, and policy or strategy is also very important to achieve successful ERP implementation. The Vision & mission should be detailed to measurable goals, step, and strategies.

3.3 The role of ERP in the company’s production cycle

The following section will describe the role of ERP in each activity in the production cycle.

3.3.1 Product design

- Better communication between sales and produc­tion department: Hsu & Chen (2004) found that after implementing ERP, sales/marketing and pro­duction department can share information and knowledge. Bharadwaj et al. (2007) also found that after ERP implementation the relationship between marketing and manufacturing depart­ments were better. Marketing/sales team could input customer order data directly into the system and at the same time the design team section could immediately create a product design that matches with the customer’s order. Besides, bill of material and the operation list could be inputted into the system. If there is any mistake in product design, the source of errors could be detected to avoid blaming among departments.

- Accuracy of Bill of Material: Lee et al. (2011) found after implementing ERP, company has only one bill of material (BOM) for the same product. The engineering department of the production department must input BOM into ERP software. When production department gets information about product modifications to match with cus­tomer desires, the BOM in ERP will be modified to match with the customer order specifications.

3.3.2 Planningandscheduling

According to Romney and Steinbart (2015: 447), there are two types of methods used for production planning. MRP-II is a method of producing products based on customer demand expectations. Lean manufacturing is a method of producing products based on customer demand. The role of ERP in this activity are:

- Better production planning: According to Portou- gal (2005), after implementing ERP, managers can easily check production plan made by pro­duction staff. The plan is also informed to the various departments involved and the production manager will review and approve the plan. Thus, this step can minimize the risk of mistakes in pro­duction plan and the risk of error in choosing products to be produced.

- Better sales forecasts: Razi and Tarn (2003) found that ERP facilities enable companies to make accurate sales forecasts by analysing past sales patterns. Portougal (2005) also mention that ERP assists companies by estimate the number of stocks to be sold based on demand history analysis.

- Better actual sales information: Powell (2013) research found that after implementing ERP, com­pany has better information on customer orders since the orders are directly inputted into the system

- Accurate and transparent information about inventory: According to Bharadwaj et al. (2007), after company implements ERP, they has trans­parent data on inventory. Kennerley & Neely (2001) also found that company could have better production plan after ERP implementation. Besides, company could have more detail infor­mation about inventory (including the age and time of inventory expiration).

- Better raw material supply management: Accord­ing to Hwang & Min (2013), supply chain is very important in to assure the smooth production pro­cess in companies that apply lean manufacturing. The ERP implementation will integrate compan­ies and their suppliers and improve coordination between them.

3.3.3 Product operation

- Efficient use of equipment and labour: Otis & Hampson (2017) found that after implementing ERP, company has better production scheduling. This better production scheduling can improve the efficiency of equipment usage, reduce change over time and further it decrease the amount of labour (Otis & Hampson 2017, Kakouris & Poly- chronopoulos 2005).

- Faster production time: After implementing ERP in the company, production time will be faster since production department gets up to date, accurate and timely information about problems that occur during production such as about raw materials that will run out (Hsu & Chen 2004).

- Better Inventory Control: According to Kennerley & Neely (2001), the role of ERP in production activities is the presentation of clear and accurate information about inventory including the price and amount of available inventory. Company can control the inventory better. It can minimize the company risk because of inventory loss. This can also minimize the risk of fraud associated with inventory. Besides, after a company implemented ERP, they can find out information about inven­tory turnover within the company and it will be used b to determine various policies related to inventory (Muscatello et al. 2003).

3.3.4 Cost accounting

- Improve data and information quality: According to Haug & Pedersen (2009), after the company implemented ERP, same data will be inputted only once to the system therefore it could increase the level of data accuracy. After implementing ERP, company also has complete production data. Besides, the retrieval of information from differ­ent departments becomes easier and quicker after the company implements ERP (Verville & Hel- lingten 2003).

- Increase the accuracy of Cost of Goods Manufac­tured calculation: Muhtadi (2015) found that cost of production calculation process is easier after implementing ERP since each department could input the cost data into the system ERP directly. Besides, the format used in each department is the same. All of these facilitate the production cost data consolidation process.

- Improve the quality of product mix decision: Lea (2007) focus to examine about product mix deci­sion issues related with the ERP implementation. To decide on product mix, companies need data about production cost, production report, and demand forecast data. The data comes from vari­ous departments. With the ERP implementation, inter department can communicate easily through one database. Data will be available in a timely manner in an understandable format. Information is updated as soon as changes and fluctuations occur. Company could get up to date information about actual sales data directly from its custom­ers. This information is useful for decision making process and further the decisions will be more qualified because they do not use outdated information.

4 CONCLUSIONS

The conclusions that can be drawn from results of the literature review of the role of ERP are:

- The production cycle consists of four main activ­ities. Prior to implementing ERP, companies implemented a standalone information system. Some of the problems related with the product design are poor communication between sales department and production department and Mis­takes in Bill of Material Preparation. In planning and scheduling stage, the problems includes error in sales forecast, inaccurate of inventory data and lack of raw materials. Problems related to product operation are delay in production time and lack of inventory control. Problems related to cost accounting include the low quality of data, inaccurate of production cost information, and wrong product mix decision.

- The success in ERP implementation depends on some factors i.e.: (1) top management support; (2) project management; (3) change management; (4) education and training; (5) teamwork and composition; (6) communication; (7) consultant support; (8) clear goal and objective.

- The roles of ERP can vary among company. Most of companies in this study got considerable bene­fits from implementing ERP. Benefits related to planning and scheduling are having better produc­tion planning, better sales forecasts (for compan­ies that implement MRP), more accurate actual sales and inventory information (for companies implementing lean manufacturing), and easier raw material demand. Benefits related to product operation are efficient use of equipment and labour, faster production time, better inventory control. Benefits related to cost accounting include improving the quality of data and infor­mation, increasing the accuracy of cost of produc­tion, and increasing quality of product mix decision.

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