Discussion
Discuss about the Factors Influencing Cloud ERP Adoption.
Enterprise Resource Planning or ERP is an enterprise application that is used in a business to analyse and customize critical business information and is used to handle deployment and upgrades. Nowadays, most of the organizations are moving from the old legacy system to the new ERP systems to replace the accounting software and home-grown systems (Developing 2013). The latest ERP system software currently available in the market is the cloud-based ERP system. Other ERP systems include the on-premise ERP systems and the hosted ERP systems.
In the following report, the different types of ERP system has been discussed and the advantages and disadvantages of the systems has been applied to real-world case studies.
The purpose of the report is to understand the various ERP systems that are present in the market now and assess their advantages and disadvantages.
The report structure is differentiated into three sections. The introduction section discusses about the ERP system in general and mentions the scope of the report. In the discussion section, various ERP systems are discussed. Two case studies demonstrating the ERP systems advantages have been discussed and two case studies demonstrating the disadvantages of the ERP system has been mentioned. The conclusion part summarizes all the key points of the report.
This ERP system includes the use of the technology within the company and maintains the entire ERP system physically in an office. Instead of ordering the services over the internet or availing a vendor supplied system, the on-premise ERP system includes cost of implementing the technology may be higher, the total ownership cost might end up lower than expected.
The technology involves the use of various systems such as accounting and payroll to assist the organization in certain business processes such as supply chain management and inventory control (SMALL 2016). The ERP system includes technology that allows it to implement customizations that are specific to the company.
The on-premise ERP system uses the two-tier architecture.
The advantages of the ERP system are proper control over the business informations such as business intelligence, logistics of supply chain management, accounting expenses and social security numbers of employees (Peng and Gala 2014). It also allows for lesser dependency on the vendor. The company can change aspects of the ERP system as per the requirements. Although the initial cost of owning the ERP system is relatively high, the cost tends to justify the implementation in the long run.
Conclusion
The disadvantages of the on-premise ERP systems are its longer implementation process and the extra IT and hardware costs. The one-time perpetual fee may be too much for certain organizations.
Hosted ERP systems was first introduced during the 1990s.The ERP system needed to be brought from a value-added seller or a publisher. The ERP system is then installed in a hosting or data centre where the virtualized and physical servers that are used by the organizations are leased or installed. A large software payment needs to be provided upfront and a rental fee needs to be provided for the hosting services.
It uses both the two tier as well as the three tier architectural model.
The advantages of hosted ERP system are that the company using this particular ERP system actually owns the software with its indefinite license. Depending on the software publisher, the maintenance fee of 15 to 20% is paid once during the implementation phase (Singh and Nagpal 2014). In case of disaster, the data is secured in a data center providing multi-site redundancy. With little interruption, the application controls can be brought in house using virtual servers like Microsoft Hyper V and VMWare.
The disadvantage of the Hosted ERP system is that the monthly costing can surpass the depending variables and in-house cost such as non-hosted solutions. The system can shut down if the internet connection closes down. It is tough to integrate local applications with hosted applications. The solution should support the mentioned ERP system and should be installed at the host center. A huge amount of bandwidth is necessary for running the hosted ERP system.
Instead of hosting the system on premise from the company’s own data center, the Cloud ERP system hosts the system on a cloud computing platform. The system allows the increase in accessibility through the internet and allows users to transfer and share information across multiple departments and externally in real time.
The technology involves modules that have certain business functions such as human capital management and financial management of the business.
It uses both the two tier as well as the three tier architecture.
The advantage of the cloud ERP system is to focus on the core business areas. It prevents the enterprise from avoiding distractions such as diluting efficiency of business and enterprise objectives. It increases the flexibility of the system and enhances the bargaining power of the user (Zhong and Rohde 2014). For adopting this innovative technology, it lowers the need for implementing IT infrastructure. It allows the business to run more globally providing mobility in work. Financially, the cloud ERP system allows for the shift of IT spending to operational expense from capital expense. It has a low initiation cost as well which helps the business to flourish dynamically due to resource provisioning (Saini, Khanna and Peddoju 2014). The system also helps to save the cost of expert staffs as the technology is implemented in the data centres that are company owned. Technically, it has stronger security facilities and gives access to state of the art technology. The system also gives easier access to IT provider experts as the service is managed centrally.
There are several disadvantages of the cloud based ERP systems. Strategically, it leads to the loss of governance and increased dependence on the vendor. It leads to the loss if critical capabilities and resources as the core applications are shifted out of the enterprise’s control (Johansson et al. 2014). There may be hidden costs mentioned in the contract. Other disadvantages include enhanced security risks, the uncertainty of scalable service, the inability to develop customized functions, no seamless interoperability between applications and improper integration of the cloud system with the legacy system.
Shaw Industries Group was founded in 1946 and was privately owned by Berkshire Hathaway. The company is based on manufacturing business of building materials, flooring and carpeting. The number of employees is over 2000. In 2012, its total revenue was 5 billion dollars. Its headquarters is located at Dalton, Georgia (Flooring from Carpet to Hardwood Floors 2018).
The company was facing some challenges related to ERP implementation for expanding internationally. Its existing systems were customized heavily for operating in North America. Another challenge was that its inherent hesitation to adopt a cloud based ERP system (Mijac, M., Picek and Stapic 2013).
For consumerization of IT and technological innovation, the company adopted the NetSuite Cloud ERP system. The solution supported the two tier ERP (Gupta and Misra 2016).
The advantages of cloud based ERP system over on premise ERP system was evident from this analogy. As mentioned above in the report, cloud based ERP system allows for more flexibility and cheaper in the initial implementation. Shaw Industries Group instead of investing a lot of money upfront got the initial advantage of providing a yearly payment to NetSuite for subscribing its services. This helped Shaw Industries to spread its yearly payment and treat it like a tax deductible expense.
Next, the benefit of Cloud ERP system to provide flexibility among all the departments of Shaw industries allowed the company to access the central data through a common interface (Johansson et al. 2015). This allowed Shaw industries to increase its collaboration with other company functions and allowed the mismanagement of data to decrease considerably. The company also benefitted with the integration of NetSuite cloud ERP as the cloud ERP allowed the Shaw industries to use its business intelligence along with the ERP system. This gave the company enough flexibility to choose which dashboards and reports worked better for the company.
After comparing the benefits of cloud ERP system with the mentioned case study and some external research, it is evident that after the implementation Shaw Industries managed to improve its agility to expand internationally with the ERP system. The lesser cost of implementing the cloud based ERP system (NetSuite) allowed the company to avoid millions of dollars in expense to build a regional data center just like on premise ERP systems (Sharma and Keswani 2013). This allowed Shaw Industries to potentially reduce its operating systems for the Asian Pacific team in staffing.
The shift to the cloud system was inevitable due to the following mentioned benefits. The quality of deployment is reduced due to the rapid implementation of IT. Cloud ERP systems are updated periodically with updates rolling out every year (Salim 2013). Some agile cloud vendors even provide monthly updates. Upgrading issues are also minimized. Its flexibility and rich user experience allowed Shaw industries to determine that moving to a cloud based ERP System will be beneficial for the company.
As a result of the benefits, the company managed to save a lot of initial IT implementation system. Moreover, Shaw industries faced enhanced agility due to the new ERP system. The two tier and cloud based approach allowed Shaw Industries to not only prepare for international expansion but also assisted the company in expanding its capacity to grow in the markets of North America (Flooring from Carpet to Hardwood Floors 2018). The flexibility and business agility provided a lot of benefits to Shaw industries. It also allowed the company to reduce is staffing operating costs. NetSuite cloud ERP system allowed the company to eliminate the need for hiring additional staffs for maintaining a physical server or skilled labour for the technology.
VINSUN infra engineering was founded in 2000 and has been providing civil and engineering services. Sunil Satav is the managing director of the company and found a critical flaw in the business operations of the company (Vinsun Infra Engineering Pvt. Ltd 2018). The company did not have any data storage or data compilation software. This led to system inefficiency due to the outdated and misplaced data on a daily basis. Ruchira Kulkarni, the CIO of the company proposed for implementing either a cloud ERP system or on premise ERP system (Vinsun Infra Engineering Pvt. Ltd 2018). The of the senior managers of the management team opposed the implementation by highlighting the disadvantages of the ERP Systems such as increased time of acceptance for the new technology, change in the business processes and high implementing costs.
There were several challenges that were faced by VINSUN organization. The traditional data collection methods were not working for the company. Management of information was difficult due to the overloading of information. Enormous effort was needed to maintain the data that was stored in Ms Excel and manual data compilation was difficult (Alajbegovic, Alexopoulos and Desalermos 2013). There was no way to determine data redundancy and integrity. Data security was non-existent as there was no data backup system. The historical data was limited hence data analysis was not possible.
Moreover, VINSUN was a small scale organization and the proposed ERP systems were expensive.
On-premise ERP systems have its own share of advantages as well as disadvantages. Some benefits of the on premise ERP system which could be used by VINSUN were the lack of internet connection and data security factor (Parthasarathy 2013). As the on premise systems work on the intranet, VINSUN organization operations would not be affected by the speed and connectivity issues. The data used by VINSUN will be properly secured by the firewall mechanism of the company. The software can also be customized as per the requirement of the company as every control is transferred to the buyer from the vendor.’
Some disadvantages of the on premise ERP systems that were considered by VNSUN were the high initial investment cost and maintenance cost. Moreover, the bug clearing, training and testing processes could have disrupted the business processes of the mentioned company (Mezghani, K., 2014).
As mentioned above in the report, cloud based ERP systems have the advantages of low initial investment costs, no need for a separate maintenance team, tried and tested features, lower business disruption and higher accessibility. The disadvantages are the data security features, high recurring costs and need for internet to function properly.
VINSUN Company proposed to adopt either an on premise ERP system from Codeautomations and Bluechip corporations or a cloud based ERP System from Codeautomations. A cost analysis was done and the initial investment and recurring annual cost for every option were evaluated and assessed. The on-premise ERP System by Codeautomations was chosen as the proper ERP system due to the benefits of lower business disruption, customization and long term benefits. Although the on premise ERP systems has the disadvantages of higher initial cost, after a few years, the cost can be recovered as the maintenance cost of the technology is constant. Although the cloud based ERP Systems have the benefit of a lower initial cost, the maintenance cost increases significantly over the years.
Despite the benefits provided by cloud based ERP systems, there are certain disadvantages that need to be addressed carefully for its proper implementation in a particular company.
Nike was founded by Knight in 1957. The company has been conducting business in sports apparels and sports shoes. In 2000, the company decided on investing in a technology that can forecast the market conditions for meeting its business requirements (Nike. Just Do It. Nike.com 2018). Due to the advantage of the forecasting system present in the cloud based ERP system of SAP, the company decided to implement it. But as the statistics were incoherent with the actual data, the company decided on shifting to another cloud based ERP system known as I2.
One of the disadvantages of implementing cloud based ERP system is the lack of expertise and resources Moreover, the cloud based ERP systems need to be evaluated carefully to analyse the company’s requirements or else the wrong product would be chosen (Weng and Hung 2014).
Due to the failure of the SAP ERP system to produce conclusive statistics, the I2 ERP system was integrated with the existing ERP system in a rush. This is another disadvantage of cloud based ERPs due to its limited number of product suites. Cloud based ERPs have a disadvantage of integrating with existing ERP systems. This affected Nike immensely as it resulted in lost functionality, complex processes and additional costs.
Careful analysis and proper employee training were not carried out effectively.
The designers and marketers of the company failed to analyse the demand of a particular product after 6 months which led to the failure in the implementation system. Lack of customization is another disadvantage of cloud based ERPs that contributed to the ERP failure of Nike. Cloud products become more configurable after every release. Functionality and customizations are considered as a standard nowadays. Being a company with the highly customizable product, the advantages provided by on premise ERPs could have been considered by Nike. But as the integration process was rushed and the customization process was limited, the I2 software failed to match the supply and demand statistics by properly mapping the products that need to be manufactured. The software needed to be integrated with other back end processes of ERP systems (Navaneethakrishnan 2013). The main aim was to reduce the number of extra shoes that are created during the demand season and consequently decrease the raw material wastage such as rubber and canvas.
Nike had a unique process of supply chain management hence the product was ordered six months in advance. The lack of training of the employees of the company was a significant disadvantage that is related to cloud based ERP systems (Duan et al. 2013). The interpretation was done incorrectly by them. This led to the loss of $100 million for the company and decreased its stock by 20%. Even after investing more than 400 billion dollars behind the ERP system, the lack of proper training led to this failure for the company.
Moreover, due to the SaaS or Software as a service nature of the ERP system, the company faced a lot of technical issues due to the cloud system. The glitch in the software led to the slow processing and wrong integration of data without other analytics. I2 was a demand plann9ng engine and it made a wrong order of thousands of Air Garnetts rather than the popular Air Jordans. This led to the excess reaction of wrong shoes and the company faced a lot of issues due to the technical issues that are related to the cloud ERP systems.
Since then the company has invested in SCM, CRM and ERP technologies and switched back to another cloud based ERP system (SAP ERP) due to its benefits of predictive algorithm for correctly forecasting demand. Proper collaboration with other industries was done with the I2 software, training was imparted and inventory levels were reduced.
The next company case study reinforces yet another disadvantage of the cloud ERP system. Hershey is one of the renowned manufacturers of chocolate all around the world. It was founded by Milton Hershey in 1894. Hershey kept the price of its products low (HERSHEY’S Candy & Recipes – Introducing HERSHEY’S GOLD, 2018). A large quantity of products needed to be sold for the company to gain the target sales of 5 billion dollars. The company urgently needed an IT system that had efficient supply chain management system and logistics.
The company ran the age-old legacy system at that point of time and due to the Y2K issue, the company was in a hurry to move to the cloud environment (Carutasu and Carutasu 2016). The company used the advantages provided by SAP ERP system in scheduling transportation management and forecasting.
But in the process, it did not consider one of the main weaknesses of cloud based ERP system. The integration cost of SaaS architecture with legacy system is considerable and is often neglected by prospective users. Moreover, the integration sometimes brings in unwanted bugs in the business scenario.
Another disadvantage of cloud based ERP system is the loss of capabilities and critical resources (Sahin 2013). With the complete access of its core data and applications gone, the company made the mistake of not conducting the systems testing which led to the failure of the implementation phase.
There were other reasons of failure too like wring timing and big bang approach but they were not related to the weakness of the ERP system. The employees were not trained properly as well which proved to be a big disadvantage for the cloud ERP system.
Due to these factors, the shipping and processing stages were delayed. Stock prices fell down and several deliveries were cancelled.
Conclusion
To conclude the report, it can be stated that the report conclusively analyses the different advantages and disadvantages of various ERP systems. Experiences of different companies have been mentioned as per the advantages and the disadvantages of the particular ERP system and the case studies are assessed accordingly. A total of four case studies have been discussed in the report where two case studies highlight the advantages of the ERP systems and two case studies are based on the disadvantages of the ERP systems. The report conclusively describes which ERP system was right for the particular company and mentions the challenges faced by the particular companies. The implication of the ERP systems on the prospective companies have been explained and the reason why the particular organization succeeded or failed in implementing the ERP system has been evaluated in the report. Although there are several drawbacks of an ERP system, the prospective advantages allow the company to continue its business operations effectively in the long run.
References
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