Int. J. Trade and Global Markets, Vol. 5, Nos.

3/4, 2012 195

Can e-management improve the Indonesian SMEs?

Agus Gunawan*
Business Administration Department,
Parahyangan Catholic University,
Bandung, West Java 40141, Indonesia
E-mail: agus@msm.nl
*Corresponding author

Mohamed A. Wahdan
El-Menoufia University,
Shebin El-Kom, Menofia, Egypt
E-mail: wahdan@msm.nl

H. Jaap van den Herik

Tilburg center for Cognition and Communication (TiCC),
Tilburg School of Humanities, Tilburg University,
Tilburg 5000 LE, The Netherlands
E-mail: h.j.vdnherik@uvt.nl

Yoke Pribadi Kornarius

Business Administration Department,
Parahyangan Catholic University,
Bandung, West Java 40141, Indonesia
E-mail: yoke.pribadi@unpar.ac.id

Bartel Van de Walle

Department of Information Management,
Tilburg School of Economics, Tilburg University,
Tilburg 5000 LE, The Netherlands
E-mail: bartel@uvt.nl

Abstract: Indonesian SMEs Garment Manufacturers (ISGMs) have lack

managerial support to compete in the global markets. The primary question is how
to support them in achieving their business targets? To answer the question, we
interviewed garment experts and financial experts. Key Performance Indicators
(KPIs) for the garment industry was constructed and an e-management system was
developed to answer the question. A combination of an Accounting Information
System anda Knowledge Intensive System was used for providing automatic
interpretation on the results of the KPIs. Our study describes e-management as a
means to increase the managerial capabilities of the ISGMs.

Copyright © 2012 Inderscience Enterprises Ltd.

196 A. Gunawan et al.

Keywords: knowledge intensive system; key performance indicators; garment

manufacturers; e-management; SMEs; small and medium size enterpries global
markets.

Reference to this paper should be made as follows: Gunawan, A., Wahdan,

M.A., van den Herik, H.J., Kornarius, Y.P. and Van de Walle, B. (2012) ‘Can
e-management improve the Indonesian SMEs?’, Int. J. Trade and Global Markets,
Vol. 5, Nos. 3/4, pp.195–213.

Biographical notes: Agus Gunawan is a PhD student of the cooperation between

Tilburg University and Maastricht School of Management, the Netherlands.
He is currently a researcher and full time lecturer of Management Information
System and Financial Management at the Business Administration Department,
Parahyangan Catholic University, Indonesia. He is also an Academic Coordinator
of Economics and Discrete Mathematics at Uni-Bridge, Indonesia and Australia.
He has Bachelor’s Degrees in Business Administration from Parahyangan Catholic
University, Indonesia and in Applied Computing from Southern Cross University,
Australia. He holds an MBA from Bandung Institute of Technology, Indonesia and
an MPhil from Maastricht School of Management.

Mohamed A. Wahdan is currently an Assistant Professor of Accounting, Auditing

and AIS at the Faculty of Commerce, El-Menoufia University, Egypt. He has a
Bachelor’s Degree in Accounting and Auditing (1989) and an MSc (1996) from
El-Menoufia University, Egypt. He has an MPhil (2003) from Maastricht School
of Management (MsM), the Netherlands. He holds a PhD (2006) from Maastricht
University, the Netherlands. He is an academic coordinator of the Global distance
MBA, MsM. He designed auditing software (AREX: Auditor’s Report EXpert).
He is teaching and supervising PhD and master’s students at three state universities
in Egypt and the Netherlands.

H. Jaap van den Herik is a Professor of Computer Science at Tilburg University,

Tilburg and Professor of Law and Computer Science at the Faculty of Law of
the Universiteit Leiden, Leiden, the Netherlands. As Scientific Director of TiCC
(Tilburg center for Cognition and Communication), he attracted many talented
researchers. He was supervisor of 58 PhD researchers. His research interests are:
computer games, serious games, adaptive agents, neural networks, information
retrieval and intelligent systems for law applications. He is a Member of the Royal
Holland Society of Sciences and Humanities (since 1999). He is a Fellow of the
European Coordinating Committee for AI (ECCAI).

Yoke Pribadi Kornarius is a researcher and lecturer of electronic Business,

Computer-based Accounting, Management Information System and Financial
Management at the Business Administration Department, Faculty of Social
and Political Sciences, Parahyangan Catholic University, Indonesia. He has
a Bachelor’s Degree in Business Administration from Parahyangan Catholic
University, Indonesia. He holds a Master of Sciences Degree from Parahyangan
Catholic University, Indonesia.

Bartel Van de Walle is an Associate Professor of Information Management at Tilburg

University, Tilburg and Guest Professor at Harbin Engineering University, China. He
is also a board member of the Flemish Institute of Technology (VITO) in Belgium.
His research is in the area of decision support systems, sensemaking and humanitarian
 Can e-management improve the Indonesian SMEs? 197

coordination. He has served as a reviewer, advisor or consultant for the American,

Dutch and Flemish National Science Foundations, the European Commission, and
the United Nations. Bartel received a Marie Curie Fellowship for his research on
threat rigidity and computer-mediated communication and decision making.

1 Introduction
For Indonesia, it is a crucial task to increase the competitiveness of Small and Medium
Sized Enterprises (SMEs). SMEs are an important contributor to employment absorption
in the whole country. In the beginning of 2010, there were 52,764,603 SMEs registered
by the Indonesian State Ministry for Cooperatives and SMEs. The SMEs then employed
96,211,332 registered persons.
During the period 2001–2008, there was a growing trend of 38.62% on the number of
Indonesian SMEs of Garment Manufacturers (ISGMs), roughly from 2,123–2,943 ISGMs. Thus,
there was a growth in general, but remarkably, at the same time there was a relatively higher
tendency of discontinuing ISGMs (see Silitonga, 2006). When the number of discontinuing
ISGMs will continue to increase, the unemployment problem will become a huge issue for
Indonesia’s economic stability. The key observation is that the discontinued ISGMs were
bankrupt mainly because they could no longer compete with the productivity, quality and low
prices of Chinese garment products (Abduddin, 2006; Indarti, 2006; Soetrisno, 2009). In 2009,
Chinese garment products, legally and illegally, dominated the domestic Indonesian market.
To complete the picture, we concentrate on the period 2005–2009. Then, there was a
declining trend in the number of SMEs. To be precise, there was a 61.73% decline in the
number of small enterprises and a 61.01% decline in the number of medium enterprises.
One of the biggest contributors to the SMEs’ declining trend were ISGMs, which are
labour-intensive. A prevailing question here is: should the Indonesia government protect the
sustainability of the ISGMs? If the answer is positive, then the government should develop
a policy that will enhance the competitiveness of the ISGMs.
The main problem for the ISGMs is that their production costs are often higher than the selling
prices of similar Chinese garment products. Thus, at first glance, the production costs should be
reduced considerably for the ISGMs to be competitive. However, production costs are in fact
subordinated to productivity and quality in the apparel industry. Moreover, it would be wise to
investigate the reasons behind the discontinuation of the ISGMs. The outcome of the investigation
is that the ISGM managers should improve managerial capabilities in their companies.
In Gunawan et al. (2010), the manager’s managerial weak points are given as a twofold
challenge. The first challenge is how to make adequate decisions based on effective
monitoring and controlling of the activities. The second challenge is the inability to interpret
financial statements and management reports appropriately. We believe that these two
challenges hamper Indonesian economic development. Above all, the ISGMs need to solve
their management problems to be competitive in the national and international scenes. Thus,
an attempt to increase the ISGM managers’ managerial capabilities is crucial (Miles et al.,
2009). In our opinion, this can be done by an e-management system.
Therefore, the paper mainly concentrates on developing an electronic management
(e-management) system. The e-management system consists of an Accounting Information
System (AIS) and a Knowledge Intensive System (KIS). For clearly identifying the tasks of
the e-management system, the business processes in garment manufacturers are investigated.
198 A. Gunawan et al.

The results are used to construct Key Performance Indicators (KPIs) for the apparel industry.
AIS will provide actual and up-to-date KPIs. The KPIs will provide a clear illustration on
the ISGM’s business performances. The knowledge extracted from KIS will support ISGM
managers in interpreting the meaning of the numbers in the KPIs. With the KIS, the managers
may obtain professional guidance, just as if they had consulted a human financial expert.
Using e-management, the managers will make better decisions and that will help them to
increase their capabilities.
For constructing an adequate e-management system, our research problem can be defined
by two research questions (RQ1 and RQ2).
RQ1 reads: what kind of KPIs are crucial for having a successful ISGM?
RQ2 reads: how can an e-management system support the ISGM managers?
The outline of the remaining of this paper is as follows. Section 2 presents the scope of
e-management needed for the ISGMs. Section 3 describes related works on the components
of e-management. Section 4 presents the research methodology. Section 5 describes the idea
of using KPIs for supporting the ISGMs in Indonesia. Section 6 presents how e-management
can support the ISGM managers. Section 7 provides our conclusions. Finally, Section 8
suggests policy implications for the Indonesian government.

2 The scope of e-management

Monitoring and controlling a company’s activities is essential for smoothly running a
company. For instance, an ISGM manager should carefully focus on the intrinsic problems
that cause low productivity, low quality and higher production costs. Currently, many
ISGM managers lack the capabilities for such a task (Gunawan et al., 2010). There are two
possibilities to improve the level of managerial abilities in decision making.
1 Replacing the current (incompetent) manager with a competent manager (be it from
Indonesia or from abroad). The new competent manager should have knowledge and
experiences about how to deal with various situations in the apparel industry for making
proper decisions (Atristain et al., 2010).
2 Supporting the current management with an e-management system. The e-management
system is a computer-based system that collects, processes, delivers and interprets
information for supporting the management tasks. With the e-management system, the
managers will be supported by up-to-date information and expert knowledge that form
the basis of their decision making (Dehning and Stratopoulos, 2002; Kristiansen, 2004).
Both solutions have advantages and disadvantages. As a result of our interviews with the
ISGMs managers in our sample (see Section 4), it transpired that the idea to appoint quite
capable managers at the ISGMs has three drawbacks.
1 The salary for a competent professional manager is too high for most ISGMs. Consider
the current situation: an ISGM has productivity and competitiveness that are considerably
lower than those of Indonesian large companies and Chinese companies (Regional
Economic and Social Analysis Unit, 2008). Consequently, most of the ISGMs see
reduced profit margins. With a minimum profit margin, they are not willing to spend
their money on hiring a professional manager.
2 There is low level of trust in a manager who is not family related to the owner of the
SME. The thinking pattern behind the low level of trust is emphasised by some bad
 Can e-management improve the Indonesian SMEs? 199

experiences with non-family persons who were not capable of performing the managerial
tasks entrusted to them. It deals, in particular, with tasks related to financial issues.
Although financial information becomes increasingly more undisclosed, currently it is
not meant to be so for non-family persons (Gunawan et al., 2011).
3 Most of the ISGM owners are also the sole manager of the company. Frequently, the
owner is the sole manager who has to deal with every issue in the company. Most of the
owners do not want to give the manager position to others.
The second possibility of attempting to support the ISGM managers by an e-management
system is usually turned down by the managers. They assume that any e-management system
will be really expensive and the benefits will not really line up with expectations. This point of
view is based on the existing e-management systems in Indonesia. Most of the implemented
e-management systems used by the ISGMs are only recording business transactions, such
as sales or purchasing orders, time cards and payment. These e-management systems can
be categorised as Transaction Processing Systems (TPSs). A TPS focuses on capturing and
processing data about daily business transactions (Whitten and Bentley, 2007).
Our solution is driven by the ISGM managers’ preference; it is more acceptable to be
supported by an intelligent software program than to have a professional newcomer as the
manager. Having said this, we will focus on e-management based on the AIS/KIS framework.
The AIS provides actual and up-to date financial information. The expert knowledge stored
in the KIS may support the managers in managing the business. The use of a KIS is based on
the previous successes of a KIS implementation in the financial domain (Huang, 2009; Khan
and Wibisono, 2008; Shiue et al., 2008; Wahdan, 2006).

3 Two types of e-management for ISGMs

There are two types of e-management. The purpose of the first type of e-management is
to support the recording of data in the ISGMs, namely as TPS. The second type has the
objective of providing valuable information, namely as KIS. In Indonesia, the common
existing e-management is TPS.
The weaknesses of the existing e-management can be classified into three classes. The
first class of weaknesses is that e-management only focuses on recording transactional data
TPS, i.e., the e-management does not provide information needed by the ISGM managers.
The second class of weaknesses is that e-management stores data into a database without
following the required accounting procedures. When the manager needs to provide a
financial analysis for obtaining funds from a bank, the manager has to perform a considerable
accounting effort. The third class of weaknesses is that the e-management does not provide
an automatic early warning if there are changes in the business performance. In monitoring
and evaluating the business performance, the managers, so far, use their own intuition.
A challenging problem arises when the owner is succeeded by someone who starts to be
involved in the business. These novice managers have to learn to build their own intuition.
The proposed e-management system aims to overcome the three classes of weaknesses.
The data stored in the database can be used to form a kind of standardisation. The standard
values are called KPIs.The KPIs are used to evaluate daily business performance. Using the
KPIs, the managers are able
• to utilise effectively the limited resources of an ISGM
• to reduce the use of manpower, material and time
200 A. Gunawan et al.

• also to achieve the ISGM’s expected results (Migdadi, 2009).

This concept has been used in many domains, such as in determining (pro-)performance
appraisal (Chen and Chen, 2010), in obtaining customer-buying patterns (Jayanthi and Vishal,
2011), in selecting suppliers/customers with the consideration of benefits, opportunities,
costs and risks (Lee, 2009) and in determining cost-volume-profit analyses (Yuan, 2009).
The e-management system for ISGMs will
• record and store data via AIS
• formulate KPIs as an indicator for the owners in monitoring and evaluating the business
• give interpretation on the information based on the knowledge stored in the KIS.
Considering the complexity of the e-management system, several methods will be used. The
concept of e-management relies on three elements:
1 model-driven
2 data mining
3 fuzzy rules (Huang, 2009; Shue et al., 2009; Xidonas et al., 2009).
When a model-driven system is used, the manager will be able to analyse the problem based
on the model and the intrinsic relations. The experts’ way of thinking in solving a problem
can be recorded in these built-in relations. However, it takes additional time in developing
the model when the complexity of the problem increases.
When data mining is used, unique patterns can be found in the historical data. By learning
trends and patterns available in the historical data, a company’s performance can be identified.
Then, the manager can obtain an in-depth insight into what happened in the past. By observing
and investigating the patterns, the system may advice a manager to pay more attention
to a specific issue. However, the identification of a pattern may be difficult. Data mining
techniques are used for analysing business performance. The source of the information is AIS.
The AIS can help managers in recording their daily transactions following the
Indonesian accounting procedures. The AIS should be the primary system that provides
the managers with the information they need to perform their daily activities. The AIS is
a system that
• collects
• records
• stores
• processes financial data to produce information for decision makers (Romney and
Steinbart, 2006).
The accounting standard followed by the AIS is the Financial Accounting Standards for
Entities without Public Accountability (Standar Akuntansi Keuangan Entitas Tanpa
Akuntabilitas Publik or SAK-ETAP). The SAK-ETAP was implemented in January 2011
and it is intended to be used by an entity that has insignificant public accountability
(i.e., SMEs). The SAK-ETAP should be applied to every ISGM. It is in line with the spirit
of the International Financial Reporting Standard for SMEs.
Fuzzy rules are a practical approach for handling uncertainty, such as the managers
encounter in high debt and high risk. Of course, it is quite difficult to determine which level
 Can e-management improve the Indonesian SMEs? 201

is to be called high. The fuzzy rules will enable managers to answer ‘what-if’ questions
without the extensive quantitative knowledge required in probabilistic models (Yuan, 2009).

4 Research methodology
Our observations are mainly taken from in-depth interviews. Thirty-one garment managers
(or owner/managers) from different companies were interviewed in our sample. The goal
was to figure out key successes for ISGMs to survive. Below, we discuss how to partition
those key successes into crucial KPIs. The average interview duration was about two and
half hours. As most of the managers were interested to use the software for free later on
(which was promised), they were willing to spend their time with us.
A multiple-case study approach is used to obtain an extensive picture. We analysed how
ISGMs have succeeded in sustaining themselves. Five companies were willing to participate
to a larger extent by providing their restricted financial data for our analysis on the condition
• that they remained anonymous
• that we were only allowed to process the data for our specific research.
The remaining ISGMs did not want to participate in providing their financial data because of
tax issues. So, we use the data from the five companies to validate the result of the interviews
with the ISGM managers.
For reasons of comparisons, we attempted to obtain the general ISGM’s financial
conditions from 2002–2008 by using the archival research results collected annually
by BPS-Statistics Indonesia. From the manufacturers who participated in the annual
manufacturing survey, a sample of 2,504 garment manufacturers was used for the purpose
of our study. The focus of our study is the biggest three categories of garment business in
Indonesia, namely:
1 wearing apparel made of textile or garment (86.78%)
2 knit wear (7.43%)
3 other wearing apparel made of textile (4.45%).
Using the financial data gathered, a semi-structured questionnaire was administered and
in-depth interviews were conducted to obtain additional knowledge from the financial experts
(affiliated to the banks and the financial service providers). Twenty-five financial experts
participated in our survey.

5 The role of key performance indicators

All ISGM managers require fast, accurate and intelligent decision making. That is the way
they wish to cope with complex dynamic enterprise resources and uncertainties from external
demands and variables. According to Rajesh (2011), ISGMs should focus on information
flow and mutual understanding among the management members. The managers need a
system that provides reliable indicators (called KPIs in this research) to support monitoring
activities.
Using the KPIs, an ISGM manager will be able to make efforts to control crucial activities,
in particular when he (henceforth, for brevity we use ‘he’ and ‘his’ whenever ‘he or she’ and
202 A. Gunawan et al.

‘his or her’ are meant) deals with various rapid changes in the business. For instance, in his
effort to reduce production costs, the manager has to be supported by a standard value of
how much raw material is needed for producing similar products. Using the KPIs, he will
be able to obtain an insight into the way of evaluating employees’ performances. Then, he
will also be able to develop an adequate policy to minimise the possibility of inefficient use
of raw material. From the KPIs, he may learn what will happen to the company’s financial
condition when he follows a specific policy.
Subsection 5.1 discusses why there are three crucial criteria for the ISGMs to survive
in the Indonesia apparel industry. Subsection 5.2 presents why high production costs
have occurred in the ISGMs (by using an Ishikawa diagram). After understanding the
causes for having low productivity, low quality and higher production costs, 16 KPIs were
constructed.

5.1 Three crucial criteria in the apparel industry

To survive in the business, there are three criteria for ISGMs. First, find an adequate strategy
for keeping the production running for the whole year. Second, keep productivity going by
competent employees with an adequate wages system. And third, keep the use of the raw
materials as efficient as possible. We discuss all three criteria below.
First, the continuity of the production throughout the year is crucial for ISGM sustainability.
When the ISGMs have zero production in some months, the ISGM managers will face hard
times maintaining competent employees. Without competent employees, the ISGMs face the
challenging problem of maintaining their productivity. Moreover, the managers still have to
pay certain fees, which is included in the fixed cost of the production.
During the period 2001–2008, on average, 8.74% of the ISGMs could not have production
through the whole year. On average, 32.50% of the ISGMs were only able to have production
for 11 months, 26.84% for 10 months and 13.34% for 9 months. From the figures, we notice
that 27.32% of the ISGMs have at least 3 months of zero production. These figures will
increase when we count the other ISGMs that did not participate in the annual manufacturing
survey of our archival data.
There are two reasons for the discontinuity of production. First, the increasing number
of the ISGMs led to a situation where supply is more than demand. More people observe
apparel industry to be a prospective business in Indonesia, in terms of both the export market
and by the domestic market. Second, the dominance of Chinese garment manufacturers
causes a reduction in orders for the ISGMs. Whatever the reasons, the ISGM managers have
to make adequate decisions to minimise the risk of discontinuity of full production.
By monitoring the production indicators, a manager will be able to observe whether
there are specific patterns on the discontinuity of garment production. For instance, in which
months does the production usually decrease? Then, he can predict why the decreasing
production took place. Moreover, he can try to develop some strategies to prevent the
discontinuity situation from re-occurring and to apply a variety of strategies to overcome it.
Second, an attempt to keep the productivity of competent employees going with an
adequate wages system is a challenging issue for the managers. The competent employees
can increase the ISGM’s productivity and profitability, e.g., by decreasing the quantity of
wasted and defective products and by speeding up the production processes.
The wages of the production employees are the second biggest component of ISGM
expenditure. The wages of the production employees reach on average 13.94% of the
 Can e-management improve the Indonesian SMEs? 203

total costs. ISGM managers observe that the costs of production reach 20% on its
maximum level. The mean of the total wages of the production employees in a year
is 2,316,902,760.73 Indonesian Dollar (over two billion IDR) while the median is
291,450,000.00 IDR (291 M IDR).
The value of the mean is much larger in relation to the value of the median because there
is a huge difference in the wages of the employees. Some people work in an ISMG that
produces domestic products and others work in an ISGM that produces export products. The
wages of the employees who are working on exported products are much higher. The reason
for having higher wages is because the skills needed for preparing exported products are
higher than for preparing domestic products. The higher skills are needed because a higher
standard of quality controls is applied to exported products.
Determining adequate wages to maintain competent employees is a complex issue.
To increase the employees’ productivity, the managers have to provide an interesting
wages level. However, if a manager put the employees’ wages level too high, there are two
consequences. First, the profit of the owner decreases significantly. Second, the high wages
level triggers other ISGM owners to offer higher wages, too. Their goal in offering a higher
wages level too is to attract the competent employees.
Usually, there are two methods of payment to employees:
1 the salary method
2 the wages method.
Some of the ISGMs in our sample use the salary method. The salary method is a
method where the employees will be paid according to a constant level during a month.
The managers have to pay more attention to supervising the employees for maintaining a
high productivity level. The drawback is that when there are no orders, the manager still
has to pay the employees. Therefore, the majority of the ISGMs use the wages method for
paying the production employees. The wages method is a method where each employee
will be paid based on the quantity produced by him in a certain period, such as a week.
The drawback of the wages method is that when there is no production, the employees
will not receive any money. Under such circumstances, it is hard to maintain competent
employees.
The employees do not only pay attention to the nominal level of the wages, but they also
compare the wages with the product specification. Different product specifications lead them
to completing the job in different time spans. For instance, an ordinary shirt needs thirty-five
different processes. When there is a special pattern on the shirt, there is the possibility of
having ten more different processes. The increase in number of processes leads to a longer
time needed for the employees to complete the job.
For hiring and maintaining competent employees, the managers must make a decision
based on various KPIs. To motivate employees to increase their productivity and quality of
work, the managers can use a wages method where each employee may have different wage
levels based on his performance. The manager’s decision may result in wages for various
categories. Under this method, the managers have to observe carefully each employee’s
performance. For an adequate attribution of the wages, the managers should be supported by
real-time information on the employee’s performance.
Third, efficiency on the use of raw materials is also crucial for ISGMs. The costs of
raw materials (including fabric, accessories and printing) are the biggest part of an ISGM’s
204 A. Gunawan et al.

expenditures. Based on the ISGM managers’ observations, the cost of raw material usually
reaches about 70% of the total costs (some interviewees indicated even 80%). By the archival
data, we were able to check the figures given to us. The costs of the fabric takes on average
59.58% of the total costs; and the cost of accessories and printing take on average 9.57% of
the total costs. Thus the range of the cost of raw material is 70% (on average).
The condition of international trade has a great impact on the costs of the imported
raw materials. Prior to 2001, many ISGM managers faced swelling debts as a result of the
weakening of IDR against the US dollar. In reacting to the great shock caused by debts
arising from use of foreign products, most of the ISGMs attempted to minimise the use
of raw material from foreign countries. During the period 2001–2008, ISGMs used more
domestic raw materials than imported ones. Based on the archival data (from 2,504
ISGMs), the mean value of material purchased in the domestic market during a year is
3,928,345,474.45 IDR (almost four billion IDR), while the mean value of imported raw
materials is 3,296,623,327.54 IDR (over three billion IDR).
When we observed the median of imported raw materials, we saw 0 IDR as the median
value. The minimum values of both domestic and imported materials are also 0 IDR. The
central tendency is zero because some of the ISGMs obtain raw materials from the customers;
they do not need to provide the raw materials by themselves. This happens because some of
the ISGMs are only providing services in producing the apparels, called CMT. CMT means
‘cut, make and trim’. CMT orders are received from garment retailers or bigger garment
manufacturers that outsource some of their production.
Managers, whether dealing with CMT or the ordinary ISGMs, do not have an ability
to control raw material prices. The prices depend on various factors such as availability,
supply, demand and international conditions. However, by monitoring the raw-material-related
indicators, the managers will be able to control the use of raw materials. When the employees
know that the manager put his attention on controlling the use of raw material, the employees
will work more carefully. This controlled behaviour is crucial in the manager’s effort to
minimise the inefficient use of raw material. Efficiency in using raw material will bring a
huge positive change in the ISGM’s profitability, by reducing production costs.

5.2 Key performance indicators for ISGMs

For garment firms, the factors productivity and quality on the sourcing side are significant
issues (Bernhard et al., 2009). It means that for the apparel industry, the ISGMs’ advantages
of productivity and quality are much more important than the ISGMs’ cost advantages.
Bernhard et al. propose that the apparel or fashion industry aims at producing and selling
standardised quality products. The advantages of productivity and quality can be broken
down in terms of six criteria, namely
1 quality of products
2 quality of labour
3 productivity level
4 product knowledge
5 technology know-how
6 securing supply sources.
 Can e-management improve the Indonesian SMEs? 205

In line with the findings by Bernhard et al. an e-management system will support the ISGM
managers to monitor significant information that lead to the six criteria mentioned above. To fulfil
the six criteria, the e-management system checks 16 KPIs related to the six entities (see below
and see Figure 1). By monitoring the 16 KPIs, the ISGMs managers are able to do a better job.

Figure 1 The Ishikawa diagram for the common reasons of higher production cost

Source: data processing from in-depth interviews

In summary, e-management exploits Information Technology (IT) and intellectual capital to

answer productivity research challenges (Käpylä et al., 2010). Intellectual capital has a key
role in development. By understanding well the meaning of daily business performances,
ISGMs managers can increase the employee’s engagement and motivation, which are critical
for the improvement (Käpylä et al., 2010).
Here we remark that low productivity, low quality and high costs may result from
inadequate interaction between the ISGMs with six entities, namely
1 suppliers
2 cutting employees
3 production employees
4 partners
5 customers
6 the management.
(see Figure 1, the Ishikawa diagram; the name Ishikawa originates from Kaoru Ishikawa,
who uses causal diagrams for showing the causes of a certain event). The Ishikawa diagram is
essential in an effort to set priorities on the most significant indicators that have to be monitored
closely.
The Ishikawa diagram helps in limiting the scope of our first version of the e-management
system. Summaries of the KPIs can be seen in Table 1. The standard value of the KPIs
will be compared. By monitoring the performance periodically, the ISGM manager will
be able to minimise the impact of a negative outlier. So, the manager will be able to
make a decision and negotiate by using the information. Every outlier performance will
be evaluated.
206 A. Gunawan et al.

Table 1 The KPIs in e-management

Entities to be evaluated F means functions to be monitored

S means standard value to evaluate
A means aims of the KPIs
Supplier F: KPI 1: Rate of material defect caused by the material itself
S: Quality of raw material purchased
A: Productivity, quality and cost control
F: KPI 2: Average production costs caused by delayed shipments
S: Performance of supplier (accuracy on delivering raw material)
A: Productivity and cost control
Cutting department F: KPI 3: Rate of waste caused by cutting processes
S: Performance on the efficient use of the fabric
A: Productivity, quality and cost control
F: KPI 4: Rate of damaged fabric by cutting processes
S: Performance on the effective cutting processes
A: Productivity, quality and cost control
F: KPI 5: Rate of the material use per group product
S: Material standard for producing similar products
A: Cost control
Sewing (production) F: KPI 6: Rate of damaged products by employees errors
department S: Performance on the effective sewing processes
A: Productivity, quality and cost control
F: KPI 7: Rate of damaged equipment by human errors
S: Performance on the effective use of sewing machine and its supplies
A: Cost control
F: KPI 8: Rate of employee productivity per hour
S: Performance on the productivity of each employee
A: Productivity and cost control
F: KPI 9: Average time to produce per group product
S: Time standard for sewing similar products
A: Productivity and cost control
Partners (outsourcing) F: KPI 10: Rate of damaged products by partner
S: Performance on the partner’s effective level
A: Productivity, quality and cost control
F: KPI 11: Average time of partner to produce per group product
S: Time standard for partner to produce similar products
A: Productivity and cost control
Customers F: KPI 12: Rate of sales return per customer
S: Sales return level of each customer
A: Cost control
F: KPI 13: Rate of credit per customer
S: Account receivable level (credit position) of each customer
A: Cost control
F: KPI 14: Rate of production costs per group product
S: Standard cost for producing similar products
A: Cost control
F: KPI 15: Rate of repeated production per group product
Internal management S: Performance on repeated production of similar products
 Can e-management improve the Indonesian SMEs? 207

Table 1 The KPIs in e-management (continued)

A: Productivity, quality and cost control

F: KPI 16: Rate of raw material inventories
S: Quota standard for each raw material inventories
A: Cost control

Source: data processing from in-depth interviews and validation on ISGMs historical data

Below, we explain in detail the elements of Figure 1. The first cause of lower productivity,
lower quality and higher transaction costs may come from the suppliers. Suppliers provide
fabrics and accessories to the ISGMs. There are two common reasons based on the interaction
with the suppliers. Defects in material bought by the ISGMs and a delayed shipment may
cause higher production costs.
Detecting the material defect in advance is important to reduce a greater loss in the further
stages. There is always a possibility for material to be defective, in particular the fabrics. What
a manager can do is monitor the level of the defect and the corresponding supplier. The rate of a
defect can be used as information to determine the price of the products that are still purchased.
Moreover, the rate of a defect can be used in a negotiation process with the supplier. The
information is called KPI 1: Rate of material defect caused by the material itself (see Table 1).
When the delivery of raw materials from the supplier comes late, employees will not be able
to work on the order. This kind of delay may lead to various kinds of costs, such as the money
to be paid to the employees for no production, fines that have to be paid to the customers, etc.
The manager has to monitor this information for controlling the supplier’s performance. The
information is called KPI 2: Average production costs caused by delayed shipments. Monitoring
KPI 1 and KPI 2 may support the manager in deciding which supplier is better to deal with.
The second reason for lower productivity, lower quality and higher transaction cost may
come from employees who work in the cutting department. There are two common causes:
1 costs of wasted fabric
2 damage by a cutting employee’s mistake.
The cutting process is a key process in the efficiency of the use of fabrics. Competency
in managing the place of apparel patterns on the fabric determines how much the residual
fabric is. The profitability of ISGMs is mainly based on this activity. The manager has to
put most of his attention to this information. He can monitor the performance of each of the
cutting employees. With a tight control, the cutting employees can be motivated to perform
better. The information is called KPI 3: Rate of waste caused by cutting processes and
KPI 4: Rate of damaged fabric by cutting processes.
One way to determine how good cutting employees perform is by comparing the KPI 3
to the standardisation on the use of the materials; the information is called KPI 5: Rate of the
material use per group product. The standardisation on the use of the materials for producing
common products is crucial to keep the appropriate efficiency levels. These standards come
from the ISGM’s historical data in making a product based on specific fabric characteristics
(see the example in Table 2). There are two methods in purchasing fabrics, namely purchase
based on the weight (kg) and purchase based on the fabric size (cm).
The third cause of lower productivity, lower quality and higher transaction costs may come
from production employees, e.g., those who work on the sewing department. There are three
208 A. Gunawan et al.

Table 2 The example of the result of the e-management: standardised use of fabric per group
product

Kinds of fabric
Group product Combat Lacoste Jean
Children apparel
a Clothes 6 pieces per kg
b Pants 70 cm (the width of the 65 cm (the width of
c Ripe fabric is 130 cm) the fabric is 130 cm)
160 pieces per kg
Adult pyjamas
a Clothes 3 pieces per kg
b Pants 3 pieces per kg
c Ripe 120 pieces per kg
Female house dress 2.5 pieces per kg
Children polo shirt
a Clothes 6 pieces per kg 5.5 pieces per kg
b Ripe 148 pieces per kg 148 pieces per kg
Adult polo shirt
a Clothes 3 pieces per kg 3 pieces per kg
b Ripe 120 pieces per kg 120 pieces per kg

Source: data processing from historical data of an ISGM

common causes, namely low quality products, longer production time and damaged equipment.
The information related to the production employees can be divided into four KPIs, namely
KPI 6: Rate of damaged products by employees errors, KPI 7: Rate of damaged equipment
by human errors, KPI 8: Rate of employee productivity per hour and KPI 9: Average time to
produce per group product. The main focus is on minimising the loss because of the production
employees.
Using the historical data, the manager can obtain the working habits of the employees
(such as the average speed of production and the speed of the production of each employee in
producing a specific product). The combination of KPI 6, KPI 7 and KPI 8 may illustrate the
working habits of each employee. Understanding the working habit, the manager can make
specific strategies to minimise the risk of low productivity that leads to higher production
costs. Based on the KPIs, the manager may motivate each employee by providing a different
wage level, depending on each employee’s performance.
When the production employees take more time to complete an order, the manager will
have to spend more money, either for paying extra time for achieving the deadline or for
paying a fine to the customer. Lateness in delivering products to a customer, in particular a
foreign customer, may result in the manager incurring a loss as a consequence of paying a
fine. The KPI9 is essential in particular in determining whether the ISGM will be a success
in catching up on production deadlines. Although different apparel patterns need different
production times, garment products can still be grouped based on basic characteristics.
The time needed to generate a product in the same group can be used as the standard
production time. Comparing the production progress with the KPI 9 can be used as the
basis for the manager to decide upon an adequate strategy to catch up on order deadlines.
 Can e-management improve the Indonesian SMEs? 209

The fourth cause of lower productivity, lower quality and higher transaction costs may
come from the partner. Partners can be divided into two groups, namely, service provider
and CMT. Service providers, such as printers, provide specific material needed by the ISGM
to produce a specific garment pattern. CMT can be used as an outsourcing alternative in
fulfilling garment orders. There are two common causes for potential loss arising from
partners, namely, low quality products and longer production times.
The reason for a manager to monitor those two causes is similar to the reason to monitor
the production employees. The information related to the partner can be divided into two
KPIs, namely KPI 10: Rate of damaged products by partner and KPI 11: Average time of
partner to produce per group product. The combination of KPI 10 and KPI 11 can be used
by the manager in controlling the partner’s performance. Using those KPIs, the manager will
be able to better approach negotiations with the partner.
The fifth cause of lower productivity, lower quality and higher transaction costs may
arise from the customers. Customers give orders to the ISGMs, but sometimes a customer
can bring a great loss to an ISGM. There are three common causes for this, arising from the
customers, namely inability to pay on time, inability to pay credit on sales and abundant
sales return. The information related to the customer can be divided into two KPIs, namely
KPI 12: Rate of sales return per customer and KPI 13: Rate of credit per customer.
High sales returns may be caused by two cases. The first case is because of the inability of the
ISGM to fulfil the product specification ordered by the customer. The second case is because some
bad customers intentionally return the products. Naturally, the defect happens unintentionally.
However, in some cases, the defects in the products are made intentionally by the customers.
These irresponsible customers attempt to minimise their risk as the result of their failure to sell the
products. To be able to return the product, they intentionally damage the products. Bad customers
in the second case are major contributors to ISGM losses (Winarto and Gunawan, 2008).
Whichever the case, the sales returns bring the ISGM less profit. By monitoring the KPI
12, the manager will be able to obtain a warning indicator when dealing with a customer
under the second case. Moreover, the manager can conduct further investigation when the
value in KPI 12 rises drastically. With this information, the manager can develop an adequate
strategy to minimise the risk that it will happen again in the future.
Monitoring an indicator of KPI 13, the manager will be able to minimise the risk of granting
more debts to unhealthy customers. Most of the time, the manager did not pay attention to a
customer’s debt accumulation. He kept in his mind that the more sales by a customer, the more
profit will be achieved. But, he did not consider the risk of having a big debt that exceeds the
maximum debt limit per customer (Kurniawan and Gunawan, 2007). Then, the best customers
may lead the company into a cash-flow-crisis when the debt management limit was violated.
The sixth cause of lower productivity, lower quality and higher transaction costs may come
from the management itself. There are three common causes arising from the management,
namely, cost miscalculation, misjudgement on saleable products and loss of inventory. The
information related to management can be divided into three KPIs, namely KPI 14: Rate of
production costs per group product, KPI 15: Rate of repeated production per group product
and KPI 16: Rate of raw material inventories.
Most CMT managers use their experience in deciding the price of a garment product.
Their straightforward method is by multiplying the sewing employees’ wages needed for
the products by three. The reason for this multiplication is as follow. One-third of the
price will be allocated as employees’ costs. One-third will be allocated for overhead costs.
Finally, the last one-third is for their profit. Then the result of this method will be added to
210 A. Gunawan et al.

the raw material costs. This straightforward calculation is not sufficient when the manager
faces the low prices of Chinese garment products. The managers have to be supported by
more accurate information whenever they have to make decisions rapidly. Supported by the
information of KPI 14, the manager will be able to figure out the cost from historical data.
Misjudgement on saleable products is the most difficult issue to solve. Trends in the
market change quite fast. Managers have to observe the market and follow their intuition to
make products that are saleable. A small contribution to get the manager’s focus on specific
products can be achieved by monitoring KPI 15. The repeated production per product group
can be used as an insight into which products are successfully absorbed by the market.
With this information, hopefully managers can make better decisions in producing garment
products, in particular when there is no order received by the ISGM.
Raw material inventories are needed. However, considering that fashion trends
change rapidly, the rate of the inventories has to be managed as well. Moreover, loss of
raw material can happen when a manager does not give attention to monitoring and to
controlling the raw material. The information from KPI 16 supports the manager in two
things, namely
1 in deciding what kind of raw material should be chosen and how much should be stored
as inventories
2 in controlling the inventories in the warehouse.

6 How can e-management support the ISGM managers?

The implementation of the KIS should start with an account of what knowledge is required
and how it changes during the decision-making process (when such a process takes a longer
time) (Jansen, 2003; Arbnor and Bjerke, 2009). The knowledge stored in the KIS is twofold.
The first is the knowledge on monitoring and evaluating garment performance obtained
from the garment industry. The second is knowledge on interpreting the meaning of financial
figures from the financial experts.
E-management is supported by continuously up-to-date information from the AIS. The
information from the AIS enables the manager to monitor business performance daily.
For instance, e-management will compare the value of KPI 5 with the records on how
many pieces have been produced by the sewing employees for one kilogram of a certain
fabric material. To illustrate, for each kg ‘combat’ fabric material, the sewing employees
have to be able to produce at least three pieces of clothes of adult pyjamas. When an
employee fails to meet the standard, e-management will consider it to be an outlier.
The e-management system will give an early warning to the manager. With this facility,
the manager will take note of the case and communicate with his supervisors to investigate
the cause of the event. If the event is because of the ineffectiveness of the employee and
it happens repeatedly, this bad performance will have an impact on the final wages of
that employee. Supported by a KIS, the manager will be able to understand the meaning
of the KPI and to evaluate the performance of the employees in the cutting department.
Aware of tight control on the side of the manager, the sewing employees will try to work
at their best.
The information from an AIS together with the knowledge stored in the KIS can be used
as a decision-support system for ISGM managers, in particular in monitoring and evaluating
the impact of the ISGM strategy on financial performances. The e-management system
provides suggestions, e.g., on
 Can e-management improve the Indonesian SMEs? 211

• to which employees the manager has to give a higher compensation

• how to negotiate with the suppliers or the partners
• how to determine the costs of production in the first negotiation with the customers.
There are two functions of the e-management system which require attention. First, the
KIS has abilities to guide the user to obtain the answers for specific questions. A KIS has
been applied to imitate the decision processes and inference logic of the financial experts
(Wahdan, 2006, Shue et al., 2009). The support required by the ISGM managers is in
analysing financial-related data and in interpreting the result of various methods in the
analysis phases. The information resulting from the system will be used for supporting
the manager in monitoring, controlling and decision-making activities.
Second, the managers are able to learn the logical thinking of financial experts by using
the KIS continuously. The manager will be able to learn how to conduct the interpretation
from the financial data. As an positive unintentional consequence, the KIS may induce
the manager to learn implicitly more about a problem (Antony and Santhanam, 2007). By
teaching managers how to acquire knowledge about a specified topic, KIS can be used as
a change agent to improve the user’s knowledge (Wahdan, 2006). This learning process
is important in terms of our goal to increase the managerial capabilities.

7 Conclusions
In their daily decision making, the ISGM managers need to be supported by knowledge
on the company and knowledge from the financial experts (see Gunawan et al., 2010).
Moreover, the managers need to be supported in using appropriate management accounting
methods. The KPIs should guide the managers to make better decisions. The KIS will help
the managers to understand the problem of higher production costs.
The KIS is an instrument for managers to learn how to monitor, control and make
decisions based on management accounting methods. The learning process is important
in terms of strengthening the manager’s managerial capabilities. Using the information
from the system, the managers will be able to observe the behaviour of employees,
customers, suppliers and partners who interact with them regularly. With an effort to
understand human behaviour, the managers may use an adequate strategy. Although it
is really hard to predict human behaviour, the system is an initial step for the ISGM in
managing employees better.
The KIS can be used as an e-management system for improving the ISGM managers’
managerial capabilities. Most of the managers in our sample changed their mind and looked
more interested in the KIS after they received an explanation about what kind of information
can be provided by the KIS. After the KIS has been implemented, the knowledge-intensive
concept enhances the ISGMs managers’ opinion that e-management is not only a kind of
TPS. Hence, we may conclude that the KIS will be in line with the specific need of the ISGM
managers. Moreover, we believe that this paper contributed to achieve a higher productivity
and higher quality in the apparel industry by explicitly listing relevant KPIs to be monitored.

8 Policy implications
Indonesia is frequently called a labour surplus country. Under the pressure of
globalisation, Indonesia should exploit the labour surplus, among others, via ISGMs.
212 A. Gunawan et al.

Many ISGMs have difficulties in obtaining adequate funding from banks. The most
important reason is that the ISGMs do not have appropriate financial statements and
cannot give a relevant impression of their managerial capabilities. By the dissemination
of e-management among the ISGMs, the government may help the ISMGs to overcome
those two weaknesses.
E-management will handle the recording activity based on Indonesia’s accounting
procedures. It will give guidance on how to monitor and to evaluate the business and it
will be a means for the ISGM managers to learn how to analyse their daily transactions. In
brief, the Indonesian government should focus on enhancing managerial capabilities of the
ISGMs. By stimulating educational support of e-management, the Indonesian government
will have a strong impact on the ISGMs.

Acknowledgments
This research is funded by the Japan Indonesia Presidential Scholarship Program (JIPS)
under the management of World Bank – Joint Japan/World Bank Graduate Scholarship
Program (JJWBGSP). The paper was presented at the International Conference on
International Business (ICIB) 2011, Thessaloniki, Greece. In addition, we would like to
extend our special thanks to the ICIB organising committee and reviewers who have given
such precious constructive comments on our paper.

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