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THE ENTERPRISE RESOURCE PLANNING APPLIED TO THE AREA OF LOGISTICS:


A CASE OF FAILURE

Conference Paper · December 2007


DOI: 10.13140/2.1.3483.5842

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SCMIS 2007

THE ENTERPRISE RESOURCE PLANNING APPLIED TO THE AREA OF


LOGISTICS: A CASE OF FAILURE

*
Bianca Soares de Oliveira Gonçalves
Agribusiness Department, UNICERP
Artur Botelho, s/n
Patrocínio, MG 38740-000
Brazil
Telephone: +55 34 3839 3737
Email: opbianca@yahoo.com.br

Priscilla Cristina Cabral Ribeiro


Production Engineering, Business, and Economy Department, Mines School
Ouro Preto Federal University
Rua Paulino Botelho de Abreu Sampaio, 1057, ap. 11-A Vila Pureza
São Carlos, SP 13561-060
Brazil
Telephones: +55 16 3372 6085, +55 16 8114 6879
Fax: +55 31 3559 1544
Emails: priscri@terra.com.br, priscilla@dep.ufscar.br, priscilla@depro.em.ufop.br

*Annibal José Scavarda


School of Management, Royal Melbourne Institute of Technology University
Level 16, 239 Bourke Street
Melbourne, Vic 3001
Australia
Telephone: +61 3 9925 1312
Fax: +61 3 9925 5960
Email: annibal@rdc.puc-rio.br

*
Mestre em Engenharia de Produção pela EESC/USP, professora e coordenadora do Departamento de
Agronegócio do Centro Universitário do Cerrado Patrocínio – UNICERP.

The Enterprise Resource Planning applied to the area of logistic: A case of failure Page 1 of 10
SCMIS 2007

THE ENTERPRISE RESOURCE PLANNING APPLIED TO THE AREA OF


LOGISTICS: A CASE OF FAILURE

Flexibility is the best result for many companies, and systems such as the Enterprise
Resource Planning (ERP) can provide logistics with more agility and make the product
flow more efficient for supply chain agents. The problem is that some companies want to
improve the results of their logistics operations with this system, but sometimes they do
not plan carefully and the results are not good. The aim of this paper is to describe the
implementation of ERP in the management of logistics operations of a major company in
Brazil, an iron and steel industry which held 27% of the Brazilian market share in 2004.
This work has a qualitative approach, a case study, in which an interview, with close and
open answers, was carried out in the company. In this case, ERP failed to live up to
expectations due to some problems with planning its implementation.

Key Words: Information Technology, Logistics, ERP, steel industry.

1. Introduction

Historically speaking, information was not relevant to logistics because there was no
efficient technology to provide necessary information. But nowadays, information is an
essential tool for logistics since now it is possible to collect information in real-time
providing unique and innovative logistics solutions. Thus, the importance of this article
lies in the obvious and relevant attention that industries have paid to logistics and
information technology not to mention the current popular employment of this topic.
Information technology enables the optimization of the logistics resources and an
integrated management of their several components. The importance given to information
technology nowadays is due to the fact that logistics uses this technology to transfer and
manage information electronically, faster, and with more efficiency and efficacy. As a
result, besides providing more quality to the clients’ information service, it provides
reduction in the logistics costs through better coordination.
An example of an information system is the Enterprise Resource Planning (ERP), a
renowned management system for solving enterprises’ information integration problems.
According to Davenport [1], the major worry on account of these systems is a high failure
rate with their implementation. Reports of implementation failure and the system’s
retirement after years of capital loss due to its poor performance are common [2]. Yu [3]
wrote that 40% of ERP implementation is deemed successful and 20% is considered a
failure. Analyzing these data it can be seen that 40% of the implementations lie between
success and failure owing to the fact that some modules were successful while others
were not since some of those modules present more implementation difficulty [4]. No
matter how effective the implementation was, most of the times the ERP systems are
unable to meet the expectations, and according to Ptak e Schragenheim [5], between 60%
and 90% of the ERP implemented systems proved to be less efficient than expected.
Given the importance of logistics and since ERP systems are of difficult and yet relevant
implementation, studying the introduction of an ERP system in this specific area is
valuable. This article aims at describing the implementation of this system in the
management of logistics operations of an industry of the siderurgical sector in Brazil
highlighting its strong and weak points and contributing with this field’s bibliography
revision. This offers new ways of approaching the problem and points out some matters
that can help management consultants when implementing information systems.

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This work presents the literature revision of the ERP system implementation phases (pre
and post-implementation), the method applied, the case study (which describes the
company logistics, The ERP implementation and its stages), the conclusion, and the
references.

2. Literature Revision

2.1. ERP System Implementation


There are several reasons that make enterprises to consider implementing an integrated
system such as ERP. According to Caldas and Wood [6] these reasons can be classified
as:
- substantive: all the imperative factors, the problems and opportunities for which ERP
systems are an adequate and effective response.
- institutional: all external forces existing in the organizational environment, which
pressure the adoption of ERP systems.
- political: the interests of power groups and coalitions inside the organization.
The following chart describes the statistics that indicate those reasons.

Reason to implement ERP % Type of Reason


Integration of processes and 91 Substantive
information
Follow trend 77 Institutional
Pressures from the IT function 41 Political
Pressuures from the head office 41 Political
Avoid giving up space to competitors 37 Substantive
Internal political reasons 31 Politcal
Media influence 29 Institutional
Influence of management gurus and 23 Institutional
consultants
Pressure from suppliers and clients 11 Substantive/Institutional
CHART 1: Reasons for implementing ERP.
Source: Caldas et al [6]

Gyampah [7] adds some reasons for enterprises to implement ERP such as:
The decision making for implementing ERP can involve three different steps [8]:
- The decision is made by high management and external consultants;
- A single corporation department, such as the department of informatics or information
technology, centralizes the decision making.
- The decision can be made by the enterprise as a whole.

According to Colangelo [9], ERP implementation should be considered as a project since


these are temporary efforts to generate a single product and are carried out to change
something that already exists and/or create something new to be added to the present
environment or substitute something that already exists. That being so, its implementation
should be planned and monitored since this project starts when the idea is first considered
and may be endless. For a better understanding, this same author divided the process into
three phases: pre-implementation, implementation, and post-implementation.

2.1.1 Pre-implementation

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With reference to Colangelo [9], the pre-implementation phase has two steps: feasibility
study and selection of products and partners.
The objective of the feasibility study is to discuss the implementation proposal to
determine its acceptance or rejection. Seeing that, initially, this study should be planned
by determining:
- which units of the company will be affected by the study;
- how to estimate the costs and benefits;
- who will be involved in the feasibility study
This study should also present an analysis of the implementation benefits determining the
strategic approaches (associated to improvements to reach a competition higher rank), and
the operational approaches (associated to improvements to business processes). The next
step is to estimate the implementation costs and develop an economic assessment of the
costs and benefits. It is important to point out that unquantifiable benefits (such as
information and flexibility) should be creatively measured somehow. At last, the
feasibility study should suggest whether or not ERP should be implemented evidencing
the decision making reasons.
The second step of the pre-implementation phase is the selection of products and partners,
which occurs when the organization decides to implement an ERP system. For this
reason, it is necessary to select the software suppliers, the ERP system, the system
implementer, and the equipment and also to analyze the processes adherence to the
system being implemented.
Selecting the software suppliers means to have ERP suppliers present their products and
services and make commercial proposals. With reference to a research done by
Bernroider e Koch [10], the size of the company influences the choice of ERP suppliers
considerably. Generally, major companies choose major suppliers, and medium-sized
companies prefer corresponding suppliers.
The choice of an ERP system involves technological and technical aspects and should be
made by specialists since there are several ERP systems. Each one has diverse technology
and practicability features. Verville e Halingten [11] highlighted that this is a high risk
and uncertain activity. This is due to the fact that making a bad purchase can affect
negatively the entire company; What is more, time and money can be wasted on software
that will not provide the return expected.
Hiring an implementer can speed up the implementing process since an expert can be
neutral to changes and know how to use tools and employ methodologies. Implementers
can be suppliers, major international professional services’ companies, certified
implementing partners, and system integrators. Choosing a specific kind depends on the
objectives of the implementation. During the implementation phase, the project team is
formed. According to Nah et al [12], this is a critical phase seeing that the team must be
consisted of consultants and internal collaborators to have enough knowledge to plan and
implement ERP successfully. Kim et al [13] add that the teams should have a functional
structure similar to that of the board of directors, which consists of different sectors’
senior managers, project senior representatives, and final users because a poor
coordination can lead to delays and organizational conflicts blocking the ERP integration
proposal.

When selecting the software, it is important to define the necessary equipment for its
implementation and to select the suppliers based on operation and performance
guarantees, price, goal, and maintenance services quality.

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An important step of this phase is the adherence analysis inasmuch as after choosing an
ERP, the implementer, and the supplier, it is imperative to check how fit the company
processes are to run the software. Corrêa et al [15] argue that failures in the analysis of
suitability or implementation of low adherence rate ERP can make the company face,
unnecessarily, some uncomfortable and expensive information system’s restrictions for a
long time, which can jeopardize the company’s potential for contributing to a significant
improvement in the operational performance. According to Ho et al [14], it is rare for an
ERP system to adapt successfully to all processes of a company, so the adherence analysis
can point out the processes that present implementation problems or even the sectors in
which ERP should not be implemented.

2.1.2. Implementation
This ERP implementation phase is divided into four steps:
Planning, Solution Design, Building and Implementation Tests
- Planning
During this step, it is necessary to choose the implementation approach. Koch et al [15]
state that there are three main ways of implementing ERP: (a) instant changeover (Big
Bang) – this is the most ambitious and difficult approach to ERP implementation;
companies cast off all their legacy systems at once and implement a single ERP system
across the entire company. (b) franchise strategy (Franchising) - A method of doing
business in which Independent ERP systems are installed in each unit, while linking
common processes, such as financial book keeping, across the enterprise. (c) “Slam-
dunk” method - ERP dictates the process design in this method, where the focus is on just
a few key processes, such as those contained in an ERP system’s financial module. The
goal here is to get ERP up and running quickly and to ditch the fancy reengineering in
favor of the ERP system’s "canned" processes.
- Solution Design
The aim of this step is to reach the objectives specified in the feasibility study. Firstly, it
is advisable to present a business processes’ view, that means to establish how the ERP
process should be executed and to define the performance standards considering the
feasibility study and planning step, so as to keep software customization to a minimum.
- Building
This is the longest step since it involves setting up the system and having it ready for
testing.
In sum, once ERP is accordingly tailored to the organization particular necessities, the
training has to be specific in order to enable its members to conduct various business
transactions based on the new ERP system.
-Tests and Implementation
This is the last step of the implementation process. Testing is a usual procedure to prove
that the system works properly, as defined by its specifications. Initially, during this step,
it must be decided who will develop the plan and who will run the tests, the data for the
tests, the criteria for solving problems, and the system acceptance criteria.
Production takes place with cut-over, a total or partial replacement of the production
systems and the beginning of the ERP operation. This indicates change management, that
is to say, after implementation, the process, people, and job positions will undergo
changes, so it is necessary to concentrate efforts to face those changes without meeting
resistance. Hehn [16] argues that if the change management is successful, implementation
is faster, consumes less energy, and is less costly because when people are willing to
change they cooperate more than when they are compelled to do so.

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2.1.3. Post-implementation
During this phase, the organization experiments ERP regarding its success and some
mistakes that might have occurred during the pre and post-implementation phases. When
using ERP, problems become inevitable. There are, however, different kinds of mistakes
such as transaction and execution mistakes, mistakes resulting from incorrect data,
configuration mistakes, and system inadequate performance. These mistakes ought to be
identified and corrected quickly.
3. Research methodology

Viana [17], divided the methodology chosen into two stages. The first consists of
bibliography and the second is a case study. A selective bibliography of works on this
subject, published by a large and distinct group of authors, was compiled. That is, it is a
theoretical reference to guide and base this article.
The research approach was qualitative since the aim is to gather information from
interviews, which include the respondents’ opinions and views, rather than having the
researcher as the only relevant source of information. The method of investigation
employed was a case study for which data from a siderurgical industry that adopts ERP as
a tool to manage its logistics were collected. The goal of this work is to establish a
relation between the theoretical and practical research in the industry, as well as
identifying relevant aspects for a better understanding of the topic of this article.
The research instrument was a questionnaire used in a face-to-face interview that was
recorded, and the transcript was made by one of the authors based on the bibliography.
This company was chosen because one of the respondents and an author were acquainted
making it easier to carry out the work thoroughly. Following the transcription, the theory
and the interview contents were systemized resulting in the next section.

4. Case Study in a Siderurgical Industry

This study highlights the inbound logistics sub area where ERP was implemented since
the other areas use different software. That being so, it is important to describe the
activities of the inbound logistics system, which is aimed at supplying organizational
materials in order to connect four operations: Materials Management, Purchase,
Receiving, Marketing and Storage For all of them, there must be a materials inventory
and a supplier management.
4.1. Logistics
The company’s logistics is divided into three sub areas:
-Outbound Logistics: responsible for delivering the finished products to the consumers.
- Inbound Logistics: responsible for the supplying logistics. This area is accountable for
purchase management, supplier’s selection, performing licitations, keeping up the
supplier’s list, etc. However, due to the decentralization policy, this function is restrict to
the universal products, that is, products used by the entire company such as cleaning
products and office supplies, among others. All other areas are responsible for
recognizing the necessity of acquiring raw materials, maintenance products and parts
since they are the users of these items.
- Harbor logistics: after privatization, it was entrusted to a consortium of companies.
Every year, a randomly chosen commercial director of one of these companies takes over
the direction of the Port of Tubarão.

4.2. Implementing ERP in logistics


4.2.1. Pre-implementation:

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In Brazil, at the time of implementation, this company had the largest number of
PeopleSoft’s ERP software modules, its software supplier. Even in The United States
there were a small number of companies that had so many PeopleSoft’s ERP software
applied. This is due to the fact that the software was less custom-tailored for the Latin
American countries than that from other suppliers like SAP. Before implementing ERP,
the systems adopted were developed by the company itself. During the pre-
implementation phase, decisions, such as implementing this system in logistics, were
made by the top management. This decision was made to follow a trend, which was
explained earlier in the bibliography and classified as institutional, external forces
existing in the organizational environment, which pressure the adoption of ERP systems.
The decision on the ERP modules supplier was also made by the top management that
chose PeopleSoft because besides supplying ERP, it also markets a BI (Business
Intelligence), which is a pre-formatted application of a Data warehouse with Insights
(management information about specific operations).
In the process of Inbound Logistics, ERP and other satellite systems manage operations
such as customer’s needs, market survey to gather a suppliers list, choosing suppliers,
product receiving, invoicing, storage, inventory, and distribution reduction . They use
three ERP modules: IN - (inventory), PO - (purchase), and e-procurement - purchase of
supplies and services through the Internet and the ERP portal, through which the suppliers
have access to the company’s information such as sales, orders, etc. There are also
satellite systems that support this software such as the materials file, developed internally.
This system was kept in the company because ERP did not meet the necessities like this
system did. Besides this one, there are also the import system (responsible for providing
the freight on rail, a function that no ERP system is designed to do) and the fuel system
(controls ship tracking, fines, and anchoring). It is important to point out that the satellite
systems work together with the ERP system.
Inbound Logistics is connected with practically all areas of the company making the
interface between this department and the others essential for the smooth operation of the
company as a whole. The company’s department of informatics creates the interface
between ERP and all the other independent software. Prior to ERP, there were only
independent systems, which were developed in the company, were integrated, and worked
properly.
Teams were put together to be responsible for implementing ERP in their specific areas,
and together with the department of informatics and PeopleSoft they received an intensive
training to ensure ERP implementation in the following year. Monthly meetings were
held to follow these teams’ work.
The teams’ organizational structure to implement ERP was as follows: at the first level, or
high level is the financial director and interest area managers’ board. At the second level
are the people responsible for the project: the manager of the department of informatics
and a consultant with Peoplesoft. At the lower levels are all teams. These teams
performed as described: first, they made a list of the necessary items for the module that
each team was responsible for; second, they checked the necessities of the departments
involved and how integrated with the modules they were; last, they had to decide whether
the module met the clients’ needs or needed customization. During this phase, the main
goal was to avoid any customization.
This area of logistics showed no need for these ERP modules, nevertheless, the top
management decided to implement them, so the Inbound Logistics had to adapt to them
making it this sector’s major objective. An after-implementation adherence analysis
indicated 68% of adherence only, which is too small a percentage to implement ERP.

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This objective is fulfilled with the increases of the percentage, which rose to 80% when
the case study was carried out.

4.2.2. Implementation
During The ERP implementation phase, the department of informatics together with
PeopleSoft decided on the implementation approach adopting the Big Bang methodology
in which companies cast off all their legacy systems at once and implement ERP, as
described earlier in the literature revision section, and which was the method employed by
the supplier. An implementation project was set up to be launched within a year. All of
the modules, previously discussed, were implemented one year before carrying out the
research. In this phase, there was also a change management, which was not enough
because the prior systems were created according to the customers’ needs; the new ERP
system had to adapt to a standard system not to a customized one like before.
It is important to point out that some tests were performed before implementation;
however, due to the previously planned schedule for a complete implementation, there
was not enough time to run all the tests on schedule.
The previous purchase system was highly efficient, and it was tailored to the company’s
needs. It issued warnings about stock replacement and minimum stock level. Adding
these functions to the ERP purchase module was rather difficult since ERP is a fairly
standard system. The ERP customization to the Inbound Logistics area began at eight
thousand hours. It was the department that required the highest software customization.

4.2.3. Post-implementation
During the Post-implementation phase, the users put up substantial resistance to ERP
because any system’s misinformation was not noticed right away making its correction a
more difficult task. Since the other systems were individually tailored, their mistakes
were discovered by the system itself before implementation. The users seemed to lack
business knowledge to deal with an integrated and open system. Owing to the fact that
ERP was not implemented in the distribution of the finished products, the customers did
not realize the problems the company had to face. On the other hand, the suppliers, who
maintained contact, had to deal with payment delay because of delayed payroll
accounting.
Yet, ERP did not bring about far-reaching changes in the company’s logistics. The
changes were very sensitive to the processes because since its implementation, the
system’s adherence rate was too low for the Inbound Logistics. In addition, this sector of
the company decided to hire ERP products consultants instead of business consultants.
Not to mention the fact that the implementation tests were performed three months after
the implementation while in the literature mentioned earlier they are performed during the
pre-implementation phase. The logistics sector aims at improving the existing modules,
enriching them, and trying to reduce the number of satellite systems. Despite the fact that
in this sector ERP achieved positive results, its implementation requires more precaution
and it should be better planned.

It is important to point out that there are no ERP key performance indicators available.
This was actually a concern of the company when the research was carried out. The
company was seeking for customer and demand satisfaction performance indicators,
checking whether or not there was reprocessing, and checking the system availability to
measure ERP performance. This could be done through the customers’ responses and by
keeping the order entry under observation since all ERP orders placed with the company’s

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department of informatics are routinely recorded. The company, therefore, was expecting
to measure the ERP performance in the near future.

5. Conclusions

It was demonstrated that ERP systems are not as efficient as related by business
consultations and the literature. In most of the cases, ERP needs to be specifically
tailored, being deprived of its own characteristics, and requires support of other systems
and information technologies. It was also noted that the pre-implementation phase
is especially important since it is during this phase that the implementation plan is fully
formulated. This planning is essential for the implementation success.
As for the ERP implementation, it can be said that the siderurgical industry is a recently
founded corporation, created in 1983, so it came onto market with its own, remarkable,
and integrated software that met the company’s needs and became a differential asset in
the market There was lack of plan and execution of all phases described in the
bibliography section, from pre-implementation to post-implementation, in this company.
The ERP was implemented as a trend not as a necessity and this was the lack of the
process of the company as the literature pointed.
The implementation was even more complicated in the logistics sector, where
customization was the greatest disadvantage experienced as mentioned earlier in the
bibliography stage. This is due to the fact that it took the company eight thousand hours
of customization depriving ERP of its own characteristics because a standard software
was purchased; even though, the logistics sector did not suit the standard requirements.
Another relevant issue is the software adherence analysis in this sector, which was carried
out after the decision to implement the system was made. It indicated a quite low
adherence rate, 68%, meaning that implementing ERP in this sector would be an arduous
work since it was not compatible with the system.
To sum up, in order to implement ERP, the company should have changed and
standardized its processes instead of customizing the software. Nevertheless, this is a
unique case since ERP was not implemented to meet the company’s needs, but rather to
follow a trend, and the systems prior to ERP were entirely integrated and well accepted by
the employees of the organization. To ensure a successful implementation, initially, it was
essential to define the company’s needs and then implement the modules wherever they
may be needed, as well as run tests, provide proper training, and choose an ERP focused
on the Brazilian market. The implementation phases described earlier in the bibliography
stage (pre-implementation, implementation, and post-implementation) are of extreme
importance. They should, indeed, be implemented gradually without skipping any steps to
achieve success.
Concluding, to be competitive in the market, companies should pursue proper integration
of their processes and activities not only through ERP systems, but also through
independent systems.

References

Academic Journals
[1] Davenport, T., 1998, Putting the enterprise into the enterprise system, Harvard
Business Review, 76 (4), 121-31.
[2] Ho, C., Wu, W. and Tai, Y., 2004, Strategies for the adaptation of ERP systems.
Industrial Management & Data Systems, 104 (3), 234-251

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[3]Yu, C., 2005, Causes influencing the effectiveness of the post-implementation ERP
system. Industrial Management & Data Systems, 105,(1), 115-132.
[4]Metaxiotis, K. , Zafeirooylos, I , NikolinakouI, K.and Psarras, J. , 2005, Goal directed
project management methodology for the support of ERP implementation and optimal
adaptation procedure. Information Management & Computer Security, 13 (1), 55-71.
[6]Caldas Wood, Jr. Thomas, 1999, Fads and fashions in management: the case of ERP.
Revista Administração de Empresas, 5 (2).
[7]Gyampah, K., 2004, ERP implementation factors. Business Process Management
Journal, 10 (2), 171-188.
[8]Bernroider, E. and Koch, S., 2001, ERP selection process in midsize and large
organizations. Business Process Management Journal, 7 (3) , 251-257
[10]Bernroider, E. and Koch, S., 2001, ERP selection process in midsize and large
organizations. Business Process Management Journal, 7 (3) , 251-257.
[11]Verville, J.and Halingten, A., 2003, Analysis of the decision process for selecting
ERP software: the case of Keller Manufacturing. Integrated Manufacturing systems, 14
(5), 423-432.
[12]Nah, F., Lau, L.and Kuang, J., 2001, Critical factors for successful implementation
of enterprise systems. Business Process Management Journal, 7 (3), 285-296.
[13] Kim, Y., Lee, Z.and Gosain, S., 2005, Impediments to successful ERP
implementation process. Business Process Management Journal, 11 (2), 158-170.
[14] Ho, C., Wu, W. and Tai, Y., 2004, Strategies for the adaptation of ERP systems.
Industrial Management & Data Systems, 104 (3), 234-251.
[15] Koch, C., Slater, D.and Baatz, E., 2004. The ABCs of ERP.
http://www.managementjournal/news/key .

Books

[5]Ptak, C.A.and Schragenheim, E., 1999, ERP: Tools, Techniques, and Applications for
Integrating the Supply Chain, CRC Press-St Lucie Press.

[9]Colangelo, Lucio C., 2001, Implantação de sistemas ERP um enfoque de longo prazo,
Atlas.
Atlas.
[16]Hehn, H., 1999, Pleopleware: como trabalhar o fator humano nas implementações de
sistemas integrados de informação (ERP), Gente.
[17]Vianna, Ilca., 2001, O. Metodologia do Trabalho Científico, um enfoque didático da
produção científica.E. P. U.

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