Risk Management of ERP Projects in Manufacturing SMEs

Risk Management of ERP Projects in Manufacturing SMEs

Päivi Iskanius (University of Oulu, Finland)
Copyright: © 2010 |Pages: 16
DOI: 10.4018/irmj.2010070105

Abstract

To deepen the knowledge on enterprise resource planning (ERP) implementation in small and medium size enterprises (SMEs), this study identifies and assesses the main risks in ERP projects through a case study of three manufacturing SMEs. Various tools, standardised methods and techniques have been developed to help enterprises better manage their ERP projects. In this paper, the author introduces two risk management methods targeted for SMEs in their ERP implementation projects. By using company-specific risk analysis method (RAM), the critical risks of the ERP projects have been identified and assessed. Then, by using characteristics analysis method (CAM), recommendations of how to divide the ERP projects into manageable sub projects are given.
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Introduction

One of the most important information technology (IT-) enabled business innovations during the past decade has been the emergence of enterprise resource planning (ERP) systems. An ERP system is a business software package that links all functions of an enterprise including order management, manufacturing, human resources, financial systems, and distribution with external suppliers and customers into a tightly integrated system with shared data and visibility (Chen, 2001). The effective implementation of an ERP system can bring about many benefits, beginning with the most general, such as cost reduction, productivity improvement, and quality improvement, but also customer service improvement, better resource management, improved decision-making and planning, and organizational empowerment (Davenport, 1998). Consequently, improvement of economic indicators is achievable, which finally leads to an increase in enterprise profitability (Soja, 2006).

ERP systems have been initially directed for the use of large-scale enterprises, however, recent research has shown that also small and medium size enterprises (SMEs) have started adopting ERP systems in order to gain competitive advantage and improve their position in the market (Maguire et al., 2007). SMEs differ from larger enterprises in important ways affecting their information-seeking practices. These differences include lack of information systems management, concentration of information-gathering responsibilities to a small number of individuals, lower levels of resources available for information-gathering, and in the quantity and quality of available environmental information (Buonanno et al., 2005). Due to aforementioned characteristics, SMEs adopt ERP systems especially because of the benefits related to the product/market (improvement of product quality, improvement in product design), financial benefits (cash flow, availability of financing, government programs of financial assistance), managerial and organizational benefits (strategic orientation with regard to technology, exposure of management to technology, relations between management and employees, competence of employees, increase in productivity), and benefits related to the sector of activity (competitiveness in terms of cost, environmental requirements) (Ariss et al., 2000).

Despite the significant benefits of ERP systems, there are number of examples where organizations were not successful in reaping the potential benefits that motivated them to make large investments in ERP implementations (Davenport, 1998, 2000; Markus & Tanis, 2000). Many ERP implementations have been difficult, lengthy, and over budget, were terminated before completion, and failed to achieve their business objectives even a year after implementation (Somers & Nelson, 2004). To achieve the desired benefits, the ERP implementation project must be carefully managed (Bingi et al., 1999; Davenport, 2000; Motwani et al., 2002), and the risks involved the projects must be properly assessed (Mark et al., 1998; Wright & Wright, 2001). Management of an ERP project is a major and risky exercise for any size of enterprise, however, risks are higher for SMEs, as the cost overruns during implementation may put financial strain on a firm and thus substantially impact firm performance (Cereola, 2006). Even with significant investments in time and resources, there is no guarantee of a successful outcome (Mabert et al., 2003).

Various tools, standardised methods and techniques have been developed to help companies to better manage their IT projects, though they are often too general for ERP application (Aloini, et al., 2007). Also, consulting, project management, change management and risk management methods are normally specified for large enterprises (Koh & Maguire, 2004). In order to support SMEs in their ERP project, targeted risk management processes are needed in this context.

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