Comparative analysis of enterprise resource planning systems in Russia and Sweden

Table of Content

1 Research Background
1.1 Introduction
1.2 Motivation of this study
1.3 Objective of the study
1.4 Delimitation of the study
1.5 Methodology
1.6 Significance of the study

2 Theoretical part
2.1 Historical background of ERP systems
2.1.1 Historical Overview
2.1.2 MRP I
2.1.3 MRP II
2.1.4 Gaps of MRP I and MRP II systems
2.1.5 How ERP facilitates
2.2 Structure of an ERP system
2.3 The need of ERP systems
2.4 Critical success factors for ERP implementations
2.4.1 Characteristics
2.4.2 Organisational perspective
2.4.3 Technological perspective
2.5 ERP Life cycle
2.6 ERP implementation stages
2.7 Implementation strategies
2.7.1 Implementation strategies after Anderegg
2.7.1.1 Big Bang implementation
2.7.1.2 Phased implementation
2.7.1.3 Parallel
2.7.1.4 Process/ product line
2.7.1.5 Hybrid
2.7.2 Implementation strategies after Parr and Shanks
2.7.2.1 Comprehensive
2.7.2.2 Vanilla
2.7.2.3 Middle-road
2.8 Change management in an ERP implementation
2.9 Risks and Failure of ERP
2.10 Benefits of ERP

3 Practical part
3.2 Global ERP market
3.3 ERP situation in Sweden
3.3 ERP situation in Russia

4 Comparative analysis
4.1 Company profiles
4.1.1 Ericsson (Sweden)
4.1.2 MTS (Russia)
4.2 Analysis of findings

5 Conclusion

Literature consulted

Appendices

List of Tables

Table 1: Historical review of ERP (Gartner Group 2004)

Table 2: Reasons for adopting ERP (Markus and Tanis 2000)

Table 3: Taxonomy of ERP implementation approaches after Parr and Shanks (2000)

Table 4: Benefit dimensions by Shang and Seddon (2000)

Table 5: Overview of ERP vertical markets (Gartner Group 2005)

Table 6: Milestones of Ericsson’s innovations (Telefonaktiebolaget LM Ericsson 2006)

Table 7: History of MTS (Mobile TeleSystems 2005)

Table 8: Consolidated subscribers at close of year in millions of customers (MTS 2005)

List of Figures

Figure 1: ERP Relations (Chen 2001)

Figure 2: Main factors influencing an implementation (Anderegg 2000)

Figure 3: Big Bang implementation strategy after Anderegg (2000)

Figure 4: Phased implementation strategy after Anderegg (2000)

Figure 5: Parallel implementation strategy after Anderegg (2000)

Figure 6: Process line implementation strategy after Anderegg (2000)

Figure 7: Hybrid implementation strategy after Anderegg (2000)

Figure 8: Stages of change (Anderegg 2000)

Figure 9: Change management (Hoetzel (2005)

Figure 10: Issues approaching Going-Live (Deloitte Consulting 1999)

Figure 11: World market value (capacity) of ERP in US$ billion (IDC 2006)

Figure 12: Potential ERP market growth in US$ billion (ARC Advisory Group 2005)

Figure 13: Top 10 ERP vendors (2004) by revenue in US$ million (Forrester Research 2005)

Figure 14: Consolidating ERP market (Lawson 2006)

Figure 15: Top 5 ERP systems in companies with over 50 employees (DataDIA 2003)

Figure 16: Ericsson’s 10 largest markets (Telefonaktiebolaget LM Ericsson 2006)

Figure 17: Ericsson net sales and growth (Telefonaktiebolaget LM Ericsson 2006)

Figure 18: Market share of subscribers as of December 2004 (MTS 2005)

1 Research Background

1.1 Introduction

Enterprise Resource Planning goes back until the 1960s. Basically, it started with inventory control and was further developed to Material Requirement Planning (MRP). In the 1980's the concept of Manufacturing Resources Planning (MRP II), which was nothing but an extension of MRP to shop floor and distribution management activities, grew in importance (Centre for Virtual Communication and Commerce (CVOC) undated).

However, as the complexity of business increased there was a need for a more integrating solution. Nowadays, an ERP system includes the following functions:

- finance/ accounting
- production
- inventory
- order management
- procurement
- human resources (HR) management

ERP systems can instantly provide information to everyone in the company who need it. If the company has several offices it is nowadays possible to have a web-based solution.

As a matter of fact the introduction of an ERP system in an organisation is one of the most costly technology initiatives that an organisation can implement. Basically, to the initial purchasing costs additional expenses for installation, implementation as well as data migration has to be added which are three to four times of the initial costs (Burleson 2001).

Nowadays, lots of ERP vendors have been established and some are doing business around the world such as the following with their market shares in 2003:

- SAP (26.7%)
- Oracle (6.8%)
- Peoplesoft (6.9%) - was taken over by Oracle in 2004
- Sage (5.8%)
- Microsoft (5.1%)

From an operative perspective, ERP systems provide a common technological platform, unique for the entire corporation, allowing the replacement of mainframes and legacy systems. This common platform serves to process automation as well as to simplify current processes either by an explicit reengineering process or by the implicit adoption of the system ‘best practices’.

Finally, the common centralised platform allows the access to data that previously have physically or logically been dispersed. The automation of the processes and the access of data allow the reduction of the operating times (thus reducing operating costs) while the latter serves to better support business decisions. A widespread criticism of ERP systems is their high total cost of ownership and hidden costs of implementation. Besides, ERP systems impose their own logic on an organisation’s strategy and culture, so ERP adopters must adapt their business processes and organisation to these models and rules.

However, as this research wants to compare ERP systems in Sweden and Russia.

1.2 Motivation of this study

The last 15 years have seen the emergence on the software market of software called Enterprise Re­source Planning systems or ERP, which has become the focus of both researchers and practitioners in the informa­tion systems area. At this time, the ERP software market is one of the fastest growing markets in the software industry with long-term growth rates of 36-40%. Some estimates put the eventual size of the market by the year 2010 at US$1 trillion (Bingi, Sharma, Godla 1999).

Since these estimates have been put forward, the ERP market has slowed down, but the overall growth of the enterprise-wide application market is still quite strong, thanks to a number of additional segments, such as Customer Rela­tionship Management (CRM) and Supply Chain Manage­ment (SCM). Also, more recently, a new trend is emerging in the market: the re-implementation and extension of ERP, referred to as ERP II. Fundamentally, ERP systems are all integrated mega packages that provide support for several or all functional areas of the firm depending upon the configu­ration purchased by the client. Their complexity is re­flected in the complexity of their implementation and deployment in organisations where they have been ob­served to have a substantial impact on everyday activities in both the short term and the long term. This has led to many reports of unsuccessful implementation, which are however matched by many reports of substantial benefits accruing to implementing firms. Thus, managers look upon ERP software as necessary evils and much research has been carried out in order to increase the success rate of ERP implementations and to ensure that benefits mate­rialise.

Kalakota and Robinson (2001) put forward four reasons why firms are prepared to spend considerable amounts on ERP systems:

1. ERP systems create a foundation upon which all applications in a firm may be developed in the future.
2. ERP systems integrate a broad range of disparate technologies into a common denominator of overall functionality
3. ERP systems create a framework that will improve customer order processing systems, which have been neglected in recent years
4. ERP systems consolidate and unify business func­tions such as manufacturing, finance, distribution and human resources

1.3 Objective of the study

The main objective of this research is to study and analyse ERP systems in Sweden and Russia. Therefore, the study compares the use of ERP in these two countries, specifically the similarities and differences.

1.4 Delimitation of the study

This research will examine ERP systems in terms of necessity, implementation, and benefits as well as failures in Sweden and Russia. It will also cover the aspect of a comparison between the use of ERP in a developing country and developed country. Besides, the basic source of information for the practical part of this paper is based on one company each in Russia as well as in Sweden. This paper does not refer to technical issues of ERP systems.

1.5 Methodology

Basically, this study will be based on primary and secondary information resources. Firstly, the literature review was carried out by consulting books, journals, newspapers, internet and other sources related to the topic. As this topic is a current managerial issue it relies mainly on press releases, academic journals, newspapers and news from the internet as well as few printed material monographs.

Secondly, primary data was acquired by interviews in Sweden and Russia. Additionally, case studies from the above mentioned countries were used to complement the practical part.

1.6 Significance of the study

The report aims to clarify in which way ERP can contribute to companies and how Russia and Sweden can learn from each other in terms of ERP implementation. This paper could be useful in both countries, Russia and Sweden as a good source for studies and further research.

Furthermore, the relevant data presented in this paper could be used for top management of companies which are deciding to implement, analyse or improve ERP systems in their organisation. It also could encourage companies to go global as it provides important information on how to act in the various countries.

Besides, the paper can be a good reference for IT-specialists who are designing and implementing ERP systems for enterprises to get a broader understanding of management practices and decisions concerning ERP management.

2 Theoretical part

2.1 Historical background of ERP systems

2.1.1 Historical Overview

In short, ERP is a platform that facilitates the database control in a company. The working mechanism of ERP is simple and easy to understand. ERP aims to unite all the data in departments and divisions in the company. The central unit referred to as the platform controls the entire system. It aims at providing connectivity in order to access information from all faculties. The benefit of ERP is largely felt nowadays when operations are becoming global in the true sense.

Before ERP has been invented computer systems could not provide good solutions for self regulated mechanisms to manage company information carefully. ERP software solutions help to remove all the drawbacks.

Basic difficulties of the Pre-ERP period were based on lack on regulations how to operate with uniform data during machine-to-machine (later computer-to-computer) transferring in the sense each machine has its own data capacity and functionality. Due to constant information transformation between different systems it could lead to data loss or even the wrong interpretation of information. The benefit of ERP overcomes such difficulties mentioned above.

Material Requirements Planning (MRP) systems were developed in the 1970s, which involved mainly planning product or parts requirements according to the master production schedule. Following this route new software systems called Manufacturing Resources Planning (MRP II) were introduced in the 1980s with an emphasis on optimising manufacturing processes by synchronising the materials with production requirements. MRP II included areas such as shop floor and distribution management, project management, finance, human resource and engineering. ERP systems first appeared in the late 1980s and the beginning of 1990s with the power of enterprise-wide, inter-functional coordination and integration. Based on the technological foundations of MRP and MRP II, ERP systems integrate business processes including manufacturing, distribution, accounting, financial, human resource management, project management, inventory management, service and maintenance, transportation providing accessibility, visibility and consistency across the enterprise. During the 1990s ERP vendors added more modules and functions as “add-ons” to the core modules giving birth to the “extended ERP”. These ERP extensions include advanced planning and scheduling, e-business solutions such as customer relationship management and supply chain management ERP.

This software was helpful in the manufacturing process, but their benefits did not extend to other sectors. ERP was developed as multifaceted software that gradually stretched its limits into other areas like human resources, finance, marketing and so on. Moreover ERP offered large reductions in costs coupled with other benefits when compared with earlier software.

MRP solutions became a hallmark of the manufacturing setups. In addition it also called for a huge pool of technical expertise in terms of manpower and machines (Erpwire.com 2005).

Both MRP I and MRP II were created with the manufacturer in mind, but ERP is more than a material and scheduling application package. ERP software packages are designed to integrate information used by all the functional areas of a business into a single database to streamline business processes for an enterprise.

MRP I is a planning tool geared specifically to assembly operations. The aim is to allow each manufacturing unit to tell its supplier what parts it requires and when it requires them. The supplier may be the upstream process within the plant or an outside supplier. Together with MRP II it is probably the most widely used planning and scheduling tool in the world. MRP was created to tackle the problem of dependent demand; determining how many of a particular component are required knowing the number of finished products. Advances in computer hardware made the calculation possible.

ERP came into being with effect from 1990 though the fact remained that many people are of the opinion that ERP existed from the year 1960 in the form of MRP I and MRP II. In fact, MRP II was more or less an ERP system except for its inability to coordinate departments other than marketing. The whole period from the year 1960 until today is denoted as the age of ERP. The benefit of ERP was slowly felt from this stage onwards (Erpwire.com 2005).

A historical overview of the evolution of enterprise systems is shown in the following table which is based on Gartner Group (2004).

illustration not visible in this excerpt

Table 1: Historical review of ERP (Gartner Group 2004)

2.1.2 MRP I

MRP I is the ancestor of enterprise resource planning. MRP I, the acronym of Material Resource Planning, was the first business application that set foot in the ERP family. MRP I functioned with the objective of increasing the business profit by enriching the business. It is important to know the problems faced by companies before understanding how Material resource planning solved them. MRP planning facilitated software functions.

In the year 1960, Dr. Joseph Orlicky invented MRP I. “This system comprised a computer that helped to compute the exact quantum of raw materials and sales” (ERPwire.com 2005). This point proved to be the start for integrating IT with manufacturing systems. Ever since computers have become inseparable after advancements in the name of MRP II and ERP while the latest one being ERP II.

An MRP system is intended to simultaneously meet three objectives:

- Ensure materials and products are available for production and delivery to customers
- Maintain the lowest possible level of inventory
- Plan manufacturing activities, delivery schedules and purchasing activities (Erpwire.com 2005)

MRP I is used by many organisations as a tool to deal with these problems. The questions it provides answers for are: (1) What items are required (2) How many are required and (3) When are they required. This applies to items that are bought in and for sub-assemblies that go into more complex items.

MRP I works like a simple mathematical formula. If all the inputs are fed in one end and the calculations are applied the output is received at the other end. Input here refers to the quantity of raw materials and expected demand along with minute details of resources like period, optimum production capacities and the current level of stocks. This information will be processed by the system. It will then let the user know the steps that should be taken for achieving the said production limits. MRP software can try to solve some routine problems related to production and it was helpful to a great extent in this aspect. However, one major downside of MRP is that it takes no account of capacity in its calculations. This means it will give results that are impossible to implement due to manpower or machine or supplier capacity constraints. Nevertheless, this is largely dealt with by MRP II.

2.1.3 MRP II

MRP II was developed with all the features of MRP I. There were also some other elements in addition to those contained in MRP I. MRP II was in existence right from the year 1960, and it was referred to as Manufacturing Resource Planning enabled to overcome the setback of MRP I, the acronym of Material Resource Planning. The analysis of MRP II reveals that it is made on the basis of finding out the quantum of materials that must be provided in order to gain the said optimum productivity levels depending on other parameters like production capacity and factors. The MRP systems were in existence before ERP technology was invented.

Response

The significant feature of MRP II is the fact that layman in industry will be able to realise its effects and hence be able to comment on the working. Any process is bound to achieve progress only if it receives valuable criticism from reliable sources and more so preferably from the end user. MRP II capitalises on this advantage mainly. This response is not restricted to a particular section of employees. Everybody will be asked to offer their opinion. The response will therefore include all the views. This will help greatly in correcting the progress from one process to another. This is deemed to be effective as it gathers responses and the necessary corrections are made then and there. Still, the MRP Systems cannot out beat ERP Technology.

Allocating reserves

The system of MRP helps to maintain a neat agenda for the manner in which the resources are to be allocated without any confusion. This means everybody will know what is expected from them within the stipulated deadline. Any discrepancy between the actual time taken and the one allotted is likely to affect the effectiveness of this operation.

Matching the requirements

MRP helps in deciding the ideal software requirements of the company. It is either calculated on the basis of minimising investments or purchasing products that render benefits for a particular time or selecting sets of products based on the coincidence of factors among them.

2.1.4 Gaps of MRP I and MRP II systems

The major problem with MRP systems is the integrity of the data. If there are errors in the inventory data, the bill of material data or the master production schedule, the output, will also be incorrect. Most vendors of this type of system recommend at least 98% data integrity for the system to give useful results.

Another major problem with MRP systems is the requirement that the user specifies how long it will take a factory to make a product from its component parts (assuming they are all available). Additionally, the system design also assumes that this "lead time" in manufacturing will be the same each time the item is made, without regard to quantity being made or other items being made simultaneously in the factory (SAP 2006).

The basic MRP logic as explained above is straightforward, however its implementation requires the ability to store, retrieve and process a large amount of data and therefore only in the seventies, when the required computer power became available and economical, did industry implement the MRP logic on a wide scale. The last twenty years of experience show that understanding the logic on a personal level is not sufficient and many MRP installations did not fulfil the expectations to improve the order fulfilment process. There are several reasons for the failure of MRP systems. First of all, the system is data intensive and if the quality of the input data is poor the system output is useless (GIGO-Garbage in Garbage Out). Thus, each person who generates data for the system should understand the importance of data accuracy even if he is not a user of the system. Also the whole order fulfilment team should develop a mutual understanding on how to use the MRP system concurrently and define the role of each team member in the dynamic integrated process. Otherwise the system is not effective in supporting an integrated order fulfilment process.

2.1.5 How ERP facilitates

ERP is a boom that helped in performing functions in a meaningful manner. This is evident from the ERP definition. When a customer places an order the company officials get immediate access to all details that are needed in fulfilling the same.

They do not get the level of stock by contacting the department in charge of inventory. Neither do they have to get in touch with the finance department to know the monetary transactions between the customer and the company till date. Nor do they have to know the transportation issues from the logistics department. All they need is available by a mouse click. This is what ERP does.

With the intervention of ERP it becomes equally easy for the other departments of the company to check the information regarding the order. In this sense each member of the staff knows their part of the job via ERP. That means ERP software solution is the one step answer.

Feasibility of ERP

When it comes to the question of implementing ERP in an organisation there are certain issues that need to be discussed and analysed systematically. Change is inevitable, but to advocate and enforce it all on a sudden will only result in confusion.

Therefore the primary step will be to verify the necessity for implementing ERP in the organisation. If the results turn out to be positive the next step will obviously be to implement it with an attitude of come what may, but before that the management in the organisation needs to ensure that it will yield the necessary benefits and not be a trouble maker, but a trouble shooter. It is therefore important to understand ERP definition before going for implementation.

2.2 Structure of an ERP system

ERP systems use a modular structure (i.e., multi-module) to support a broad spectrum of key operational areas of the organisation. According to Kalakota and Robinson (2001) the multiple core applications comprising an ERP system are themselves built from smaller software modules that perform specific business processes within a given functional area. For example, a manufacturing application normally includes modules that permit sales and inventory tracking, forecasting raw-material requirements and planning plant maintenance.

Typically, an ERP system is integrated across the enterprise with a common relational database, storing data on every function. ERP systems are widely acknowledged as having the potential to radically change existing businesses by bringing improvements in efficiency, effectiveness, and the implementation of optimised business processes. One of the key reasons why managers have sought to proceed with difficult ERP projects is to end the fragmentation of current systems, to allow a process of standardisation, to give more visibility on data across the entire corporation and, in some cases, to obtain competitive advantage (Annex 1)

Furthermore, ERP systems have expanded to include back-office functions, such as operations, logistics, financials or human resources and non-transaction-based systems or front-office functions, such as sales, marketing and customer services as an integral component. This inclusion is a result of the emergence of Supply Chain Management (SCM) and Customer Relationship Management (CRM) strategies and systems. While the names and numbers of modules of the ERP systems available on the market may differ, a typical system integrates all its functions by allowing modules to share and transfer information freely and by centralising all information in a single database (Chen 2001) as shown in Figure 1.

illustration not visible in this excerpt

Figure 1: ERP Relations (Chen 2001)

ERP packages force an organisation to implement a proven set of business processes, which means that there is no need for the organisation to reinvent the wheel. ERP packages encapsulate reusable best practice business processes. As state of the art technology and processes move forward, purchasers of packaged software move with them. ERP packages give the foundation to the business, thus the management can concentrate on grabbing market share.

Kalakota and Robinson (2001) stress that the popularity of ERP systems stems from the fact that they appear to solve the challenges posed by portfolios of disconnected, uncoordinated applications that have outlived their usefulness. These legacy systems provide one of the biggest drags on business productivity and performance because maintaining many different computer systems leads to enormous costs (Chen 2001). These include: direct costs such as rationalisation, redundancy, re-keying, reformatting, updating, debugging or deleting. Additionally, it includes indirect costs such as a company’s purchasing and sales system which cannot communicate with its production/scheduling systems, leading manufacturing productivity and customer service to suffer. Crucially, management may be left to make vital decisions based on information from incompatible systems, thereby relying on instinct rather than sound business rationale.

2.3 The need of ERP systems

Basically, the need of an ERP system varies from company to company due to the size of the company, the business as well as other factors which influence the need of an enterprise planning system. However, Markus and Tanis (2000) state that both small and large companies can benefit technically and strategically from investments in Enterprise Resource Systems. Generally, the needs and opportunities of small companies are a subset of those facing large companies.

However, in today’s markets, flexibility, quality, cost and time are the four dimensions or cornerstones of competitiveness leading to the survival of an organisation and to its success (Shtub 1999). As competition is increasing more and more in today’s business world companies are under pressure to stay in the market. Customers are expecting high quality, low prices, fast deliveries and a good overall service. Meeting the customers’ expectation requires quick and right decision making which should be based on accurate and timely information (ERP-Software.us 2006). Using an ERP system provides the company with real-time information which helps the management to make faster decisions.

Furthermore, as companies are expanding their business and business functions the organisational structure is getting more complex. As divisions are increasing and every division is using its own database (e.g. the finance department uses different figures than the sales department) it could lead to an increase of databases used within the company. Multiple databases consequently need to be translated and transferred from one department to another. This formatting procedure is time consuming and could lead to inaccuracies within the figures which would not happen with ERP as the system is drawing from one single database (ERP-Software.us 2006).

Another indicator for the need of ERP in a company is when there is more manual and repetitive work in the system to get the overall picture of the business (Agni Software 2005). This means for example if one wants to find out the status of a customer’s order and the only way is to manually logging-in to different systems and cross checking the different sources of information then an ERP system would be most efficient (RealCommerce 2006).

Companies should also consider an ERP solution if they have no control over their inventory and if there is no proper planning for the raw material sourcing. These aspects could lead to increased delivery time which consequently will result in poor customer service.

The following table shows a summary of technical as well as business reasons for the need of an ERP system.

illustration not visible in this excerpt

Table 2: Reasons for adopting ERP (Markus and Tanis 2000)

2.4 Critical success factors for ERP implementations

2.4.1 Characteristics

As the implementation of an ERP system is a complex project there are certain aspects which should be considered carefully in advance leading to a success of the implementation. These aspects are most commonly named critical success factors (CSF) in the literature.

Critical success factors can be viewed as situated exemplars that help to extend the boundaries of process improvement, and whose effect is much richer if viewed within the context of their importance in each stage of the implementation process (Somers, Nelson 2001).

The 15 most important CSF for the implementation of an ongoing ERP project identified by the literature review will be elucidated in the following chapter. A differentiation between organisational (10 CSF) and technical (5 CSF) factors will be shown and analysed in this chapter.

2.4.2 Organisational perspective

The following 10 organisational CSF will be explained more detailed:

- Management support
- Project Management
- Clear and measurable objectives
- Open communication to the entire company
- Change management
- User involvement
- Appropriate and timely training
- External consultants
- Trust between partners (consultants, software and hardware vendors, etc.)
- Active risk management

[...]