ERP IMPEMENTATION ISSUES, ROI AND COST OF ERP & ENABLING E-BUSINESS :

OIL INDUSTRY CASE STUDY

By

Prasant Rout

A dissertation submitted in partial fulfillment of the requirements for the degree of Executive Post Graduate Programme XLRI, Jamshedpur 2001-04

to Prof A K Pani

Dated 27th February 2004

XLRI, Jamshedpur Abstract ERP IMPLEMENTATION ISSUES, ROI, TRANSFOMING TO E-BUSINESS : A OIL INDUSTRY CASE STUDY by Prasant Rout Dissertation Guide: Dr Ashis K Pani Department of Information System

An ERP Journey normally has all the thrills, heartbreaks and hard work that is involved in a traditional Indian marriage. The decision is taken amidst much fanfare and celebration, the preparations to receive the new entrant are hectic and occasionally full of tension, and the actual internalization often falls short of expectations in the initial phase, and needs lot of mindset adjustments to make the marriage really successful. Business process re-engineering is a need in the liberalized economy to remain competitive and e-commerce is emerging as the new business model. The paper describes the ERP implementation issues, cost benefit analysis and e-business initiatives based on the case study of two large oil companies of India. The focus of the research article is the organizational, technical, transition management issues in ERP implementation. Most of the factors attributable to the success of ERP implementation are not technical but organizational and cultural in nature. Can ERP and BPR go hand-in-hand or BPR will follow an ERP implementation are issues of concern for management before committing exorbitant cost for the ERP implementation. The other focus area of the research article is the illusive ROI on ERP. Finally, the article discusses the e-business initiatives in the oil sector, based on the technology platform of the ERP. The recent directive by Central Vigilance Commission advising the organizations to decide and work out a detailed procedure for eProcurement/reverse auction has encouraged the Oil PSUs to take initiatives in this regard. The cycle time for procurement and transaction cost is envisaged to be reduced significantly in the oil sector with positive impact on the bottom line. The ERP/E-business matrix framework is

discussed for the present and future positioning of the organizations in the Information Revolution the Third Wave.

TABLE OF CONTENTS

1. 2. 3. 4. 5. 6.

Introduction Oil Industry Case Study ERP implementation issues ROI on ERP e-Business Initiative on ERP platform Conclusion

LIST OF FIGURES

Number

Page

1. Oil Industry Physical Process 2. Oil Industry Business Process 3. ERP Framework 4. ERP and Add-on Application Framework 5. Terrestrial Network Layout 6. V-SAT Landscape 7. Data Center Server Land Scape 8. Disaster Site Framework 9. MAN Framework

1 2-3 4 5 6 7 8 9 10

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ACKNOWLEDGMENTS

The author wishes to sincerely thank Prof Ashis Kumar Pani for his support and guidance in compilation of the dissertation case study. I sincerely thank, Sh Arup Kumar Bhagabati, Senior Manager of ERP technology group of IOCL for providing information on the IOCL ERP project titled Manthan. I also thank all colleagues and seniors working in different locations of IOCL for sharing their experience in ERP implementation, which is a strategic asset in planning a mega ERP project with minute details.

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GLOSSARY

Word. [Click and type definition here.] ( To be Completed after final compilation )

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Chapter 1

INTRODUCTION

In todays Information Technology and era of globalisation, one of the easiest decisions to take seems to be to put in an ERP Software into the organization. An ERP Journey normally has all the thrills, heartbreaks and hard work that is involved in a traditional Indian marriage. The decision is taken amidst much fanfare and celebration, the preparations to receive the new entrant are hectic and occasionally full of tension, and the actual internalization often falls short of expectations in the initial phase, and needs a lot of Mindset adjustments to make the marriage really successful. The flexibility of modern-day ERP Applications is a result of their evolution from the older Material Requirement Planning (MRP) and next generation Manufacturing Resources Planning (MRP II) and Distribution Requirements Planning (DRP) Applications. Todays ERP Systems have hundreds, even thousands of imbedded Application Parameters and Logic Tables that lend themselves to adaptation to specific Company decision Rules and Procedures. This often gives the false notion that virtually any Company can implement and benefit from the Package. In reality, whatever be the Product, a hard look at the Business Processes of the enterprise is a necessary step in clearing the decks for a successful ERP Implementation. But before we go into all that jargon, statistics and other analysis, its important to know and understand few basics.

What is ERP ?
Enterprise Resource Planning (ERP) is software driven business management system which integrates all facets of the business, including planning, manufacturing, sales, and marketing. The business environment has become increasingly complex and the marketplace has changed from local to global. Management world over esp. in Developing Countries like India is under constant pressure to improve competitiveness by lowering operating costs and improving logistics. Organizations therefore have to be more responsive to the customer and competition. ERP as a business solution aims to help the management by setting better business practices and equipping them with the right information to take timely decisions.

Evolution of ERP
The history of ERP can be traced back to the 1960s, when the focus of systems was mainly towards inventory control. Most of the systems software were designed to handle inventory based in traditional inventory concepts. Later in a 1970s a shift was witnessed to focus towards MRP. This system helped in

translating the master production schedule into requirements for individual units like sub assemblies, components and other raw material planning and procurement. This system was involved mainly in planning the raw material requirements. Further, in 1980s the concept of MRP-II came up, which involved optimizing the entire plant production process. Though MRP-II, in the beginning was an extension of MRP to include shop floor and distribution management activities, during later years, MRP-II was further extended to include areas like Finance, Human Resource, Engineering, Project Management etc. This gave birth to ERP which covered the cross-functional coordination and integration in support of the production process. The ERP as compared to its ancestors included the entire range of a companys activities.

Most ERP systems were designed to be used by discreet manufacturing companies (who make physical things that can be counted), which immediately left all the process manufacturers (oil, chemical and utility companies that measure their products by flow rather than individual units) out in the cold. Each of these industries has struggled with the different ERP vendors to modify core ERP programs to their needs.
ERP addresses both system requirements and technology aspects including client/server distributed architecture, RDBMS/OLTP application, data ware housing/OLAP applications, portal and e-commerce.

Evaluation Criteria
A Company's management first interacts with ERP systems most often in the grueling vendor-selection process. Focusing the ERP system selection on a single vendor often results in a search conducted without data, with no identifiable evaluation criteria, and no vision of the value of the system. Experience and research have revealed four major stumbling blocks to successful vendor selection. These are: Time: The ERP software selection process in a medium to large organization can consume up to 12-15 months, with much of the effort spent identifying the key evaluation criteria and collecting data on the alternatives. Cost: A major part of the total cost of ERP software selection is largely hidden in the employee time mentioned above. Personal and travel expenses incurred during the selection process, developing RFP, gathering and validating product data, and interviewing vendors contribute to almost 25-30% of the overall cost. Validated Data: Organizations have reported that they lack objective, validated data on vendor products and services, and are often forced to rely solely on the vendor RFP responses, presentations, or marketing materials, to make their final decision.

Unstructured Selection Process: With the absence of a structured and rigorous selection methodology, many organizations end up either focusing on a very limited set of criteria or caving into internal political agendas or gut feelings. The most important criteria for selecting an ERP solution is the functionality. This is where most of the companies are now focusing on getting the best-of-breed solutions. The return on investment justifies the extra cost that one has to pay to get the best-configured solution. The technical architecture evaluates the fit between the information system and the end user's needs by looking at the environment in which the application is available, the user-interface capabilities, the third-party software interface capabilities, the software architecture of the application, the development and management tools associated with the application, and the data and process models available with the application. To sum up, Evaluating ERP software on the below mentioned criteria can help companies select the software packages that makes the best sense for them. The general Factors which go in to evaluating and assessing a ERP solution or software are: Functional fit with the Companys business processes Degree of integration between the various components of the ERP system Flexibility and scalability User friendliness and Ease of implementation Ability to support multi-site planning and control Technology - client/server capabilities, database independence, security Amount of customization required Local support infrastructure Reputation and sustainability of the ERP vendor Total costs, including cost of license, training, implementation, maintenance, customization and hardware requirements.

ERP in India
Until recently Indian organizations were in a sellers market and operating in a regulated environment. They grew by managing the environment, rather than innovating and improving internal efficiencies. The customer was taken for granted and quality was available only at a premium. With globalization and gradual lifting of regulation, there is a paradigm shift in running the business.

Indian companies therefore need to implement ERP systems for improving their business processes and becoming more competitive in the global environment. Though ERP implementation is costly and time consuming, it has several benefits which will help recover these costs in the long run. According to NASSCOM, during the year 1998-99, the Indian ERP market has been estimated at Rs 200mn compared to Rs 2800mn in the year 2001-02 ie a growth of 85% yoy. The growth in the export market was far higher and more than doubled during the same time period. According to the NASSCOM, In FY2001-02, the total Indian ERP market is nearly 4 times and has reached Rs 65bn compared to Rs13.4bn in 1998-99.

Indian ERP market Size

Rs mn 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02

Domestic 500.0 900.0 2,800.0 5,200.0 10,000.0 18,000.0 25,000.0

% yoy

Exports 700.0

% yoy

Total 1,200.0

% yoy

80.0 211.1 85.7 92.3 80.0 38.9

1,800.0 3,400.0 8,200.0 15,000.0 28,000.0 40,000.0

157.1 88.9

2,700.0 6,200.0

125.0 129.6 116.1 86.6 84.0 41.3

141.2 13,400.0 82.9 25,000.0 86.7 46,000.0 42.9 65,000.0

Source: NASSCOM

Companies of all sizes and industries are installing Enterprise Resource Planning (ERP) software in order to improve business processes or replace aging enterprise systems. The core set of technologies and capabilities needed to accomplish the desired results is often not obtainable in-house, due to high costs and lack of resources. This means that ERP customers must find ways to engage top-notch ERP experts According to IDC, the ERP market in India has been witnessing a CAGR of 20-30 percent consistently over the last 5-6 years. As a result, the market was already at Rs 250 crore in 1999-2000, leapfrogging from Rs 12 crore in 1995-96, Rs 27 crore in 1996-97, Rs 62 crore in 1997-98 and Rs134 crore in 1998-99. Therefore, the

Indian ERP market touching Rs 460 crore in 2000-01, accounting for nearly 8.4 percent of the total Asia-Pacific market for ERP solutions should have hardly caused surprise.

ERP Market Size (in India) in millions (Rs)

700 600 500 400 300 200
Although the pattern of adoption and successful implementation of ERP in India 100 revolved around the manufacturing, FMCG, automotive, steel, oil, textile and pharma sectors, the real aggressor in 2001 was the SME segment. In fact, of 0 the 791 firms in India at the end of 2001 who have an ERP solution in place, almost 95-96 to the 97-98 98-99 99-00 00-01 200160 percent belong 96-97 SME segment. With different vendors coming out with 02 country-specific localization, besides having a large pool of skilled functional and technical talent available, the total cost of ownership of an ERP solution dropped significantly. This caused a substantial increase in penetration levels in the SME segment. Some of the more prominent names in the SME segment joining the ERP roster in 2001 were Tribhovandas Bhimji Zaveri, Nippo Batteries, Baroda Dairy, Bacardi and Haldiram among others. However, the market is also witnessing new avenues like the emergence of SMEs (Small and Medium Enterprises) as a major ERP spender with significant demand for module specific implementation. Larger ERP firms are shifting their focus to the middle market. Also, other areas like Supply Chain Management (SCM), Customer Relationship Management (CRM), extended ERP and Web enabled ERP are catching attention. ERP market by functional areas % of total Finance & accounting Customer management MRP Material order 1996 27.0 14.6 16.1 11.3 1997 28.7 14.7 15.5 11.1 1998 30.0 14.6 15.0 10.9 1999 31.2 14.4 14.4 10.8 2000 32.1 14.1 14.1 10.5 2001 32.9 13.7 13.8 10.2

Decision support Non-ERP Apps Total

Source: AMR

5.2 25.7 100.0

5.0 24.9 100.0

4.8 24.6 100.0

4.6 24.6 100.0

4.4 24.8 100.0

4.1 25.2 100.0

The year also witnessed some tangible quantitative benefits for Indian companies coming out of ERP implementation. BPCLs implementation of SAP R/3 resulted in total annual saving of Rs 40 crore, Fosters India brought down its inventory from 20 days to less than a week with QAD MFG/PRO and more ERP success stories were being suddenly churned out dime-a-dozen.

ERP Vendors Emerging as Major e-Business Enablers

ERP vendors are fast transforming themselves into vendors offering applications for e-Business enablement with an extended and integrated product range. The ERP software market has been to be of the tune of Rs.321 Crores in the year 2000-01 and is expected to reach Rs.507.5 Crores by 2005-06, exhibiting a compounded annual growth rate (CAGR) of 9.6%(IDC (India) report 'ERP Market in India:2001'). The report projects the outlook for ERP applications market for the period 2001-02 to 2005-06 and is based on a survey conducted in 1731 organizations of the top 8 cities of India segmented on the basis of organization size and 11 vertical segments. Key players in the ERP applications market have been found employing a two pronged strategy to cater to both the mature market of large organizations as well as the high potential market of the SME segment. They cater to the large organizations which are driven by the strategic business need of automating their processes and web orienting their activities. Also, the players are offering easy to use and easy to deploy functional solutions which can be easily extended and have web enablement features. This is being observed as a step towards catering to the functional point solution needs of SME businesses in the market who would also be looking at internet enablement.

Adoptions Status of ERP in India (%) Small Medium Large (< 50 (50-499 (> 500 employees) Employees) employees) Number of PC owning organizations who are aware 45029 16572 4063 of ERP across top 8 cities of India

Implemented Planning/ Evaluating Not considering seriously Refused to answer Source: IDC (India)

0.9% 2.7% 81.5% 14.7%

6.5% 4.7% 75.9% 13.0%

35.6% 33.5% 28.8% 2.1%

1. As can be seen from the table, a sizeable number of the large organizations have already implemented the ERP solution or planning to do so. The current requirement according to the report, is for enhancing their existing solutions to incorporate front office solutions (CRM) and supply chain solutions (SCM) and having the solutions internet enabled to move towards e-Business. 2. Another noticeable trend in the table is the fact that over 5% mid-sized organizations are planning to implement ERP, which when translated into absolute numbers mean volume business. Hence, at present, the mid-sized organizations would fuel the sales of point solutions. This has resulted in the need for new type of partnerships for the ERP vendors. With the CRM and SCM markets expected to grow rapidly.

ERP: Best-of-breed solutions

There are two reasons why we need to re-evaluate ERP software: a shift towards business models that take enterprise wide view and an evolution in technical architecture. With growing competition there has been a significant shift in the business models by the ERP vendors, from line-of-business oriented activities to more processdriven models. Some software are good in a specific function, while the others are good in technology. As a result, companies have had to spend a lot of time and money into getting the desired results from these software. This is where the companies have realized that no single ERP software can give them the best possible performance in all the functions. Combining the influences of business process reengineering with the functional limitations, a new stage has been set that alters the role of ERP applications. And this has led to an increasing number of companies to opt for the best-of-breed solution. The evolution of computer architecture also encourages the reexamination of ERP software. Client / server technology has had a significant impact in reapportioning work modules among the desktop, mid-tier systems and enterprise server platforms. The traditional ERP applications seem outdated with the technological changes. Integrated versus Best-of-breed The most important question facing the company's evaluating ERP packaged applications is whether to purchase integrated or best-of-breed solutions. Integrated packages cover various functional modules including manufacturing, logistics, finance, service and maintenance, and human resources. Since most of

the ERP vendors price on a per-named user basis, buying more functional modules from a single vendor can push down the average cost per user. However, integrated applications are not a foolproof solution. Firstly, since integrated implementations require enterprise wide consensus, they require more time. Given the ERP software currently available, each of them is strong in some functional area and weak in the others. This has made more and more customers want the best from each of these software and integrate them, so that they have the most effective solution for their organization.

Ground SET for ERP II

With traditional ERP seeing a slowdown amidst widespread disillusionment surrounding it, users are now adopting Second Generation ERP or what Gartner terms ERP II. More and more vendors are adopting ERP II features into their traditional ERP offerings. As per a Gartner Report, by the year 2004 the top five revenue-generating ERP vendors will be ERP II vendors. ERP vendors will be forced by c-commerce (collaborative commerce) and limited R&D budgets to transform themselves into ERP II vendors, states the report. While ERP II has gained quite some ground in the international market, it will take some time for it to gain a strong foothold in the Indian market, which is still in a nascent stage. According to an expert, being second generation ERP, the target market segment of ERP II is going to be the same as traditional ERP worth Rs 321 crore for 2000-2001, and estimated at Rs 507.5 crore by 2005-2006, as per IDC estimates. To throw adequate light on the factors that will drive growth of ERP II in the Indian market, A relative analysis of traditional ERP and ERP II is essential: Architecture The primary area of contention between traditional ERP and ERP II lies in the basic architectural design of the two, which renders shape to the most important considerations of investment, ROI and the implementation cycle. As opposed to the Web-aware, closed and monolithic architecture of ERP, ERP II boasts of a Webbased, open, and most importantly, componentized architecture and focus on ebusiness. Customer and supplier side integration can be done independent of the core ERP modules or in parallel to reduce the total implementation time. Investments and implementation cycle The upfront investment associated with a truly ERP II architecture is significantly lesser than the upfront costs in traditional ERP. Owing to its componentized architecture, investment in ERP II can be carried out in phases. As a result of this, the time to implement is also significantly lower as low as eight weeks. As opposed to this, the implementation cycle with traditional ERP can be as long as 12 years, which involves going for a complete implementation in one go.

Return on Investment From the perspective of top management of any firm, it is the quick return on investment that makes ERP II very attractive. The pay back period is very short ranging from 2-3 months since the implementation cycle is short. The CRM and SCM modules makes the transaction cost less. Whats important is that in the case of ERP II, investment in subsequent phases (to address other business processes) can often be funded from the benefits derived from the earlier phase. Ease of use Thanks to its open, Web-based and componentized architecture, ERP II is flexible and easy to use. This also makes the change management exercise in user organizations far simpler. In fact, according to Gartner, by the year 2005, ERP vendors failure to develop architectural componentization will be the single largest cause of vendor deselection. This will lead many traditional ERP vendors to take to ERP II. Towards c-commerce with ERP II Another point of contention between traditional ERP and ERP II is in terms of the respective roles of the two. The role and vision of ERP centers around resource planning, inventory accuracy, and visibility beyond the plant and throughout the manufacturing enterprise. The fundamental assumptions/principles on which ERP was built are based on business processes designed for mass production, and control of the enterprise, with its foundation not built for collaboration. However, the role of ERP II expands the role of ERP a design to optimize the enterprises resources to one of enabling and optimizing interenterprise collaborative, operational and financial processes, leading to c-commerce (collaborative commerce) enablement and value chain participation. Deeper domain functionality There are certain fundamental functional and architectural holes in most traditional ERP systems for non-manufacturing industries. Again, ERP II scores as its domain expands beyond traditional ERPs domain of manufacturing and distribution to include non-manufacturing industries as well.

Implementation
No ERP software can benefit an organization unless it is implemented well. Implementation costs are typically twice or even thrice the cost of the product.

Strategy

Process

Technology

Business Case & Benefits Realization Design a Standardize, Develop, competitive streamline and customize, and strategy driven simplify core integrate IT toward business strategy to operational processes across enable excellence and the enterprise. achievement of customer strategic goals. satisfaction.

People Communicate the mandate for change, engage the entire organization, and enable the changes by training the people on their newly defined roles and responsibilities. Program Leadership & Project Achieve speed and integration in enterprise transformation

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ERP implementation costs can be segregated as under Technical costs Hardware, software and communication Technical and functional personnel deputed for implementation Data creation costs Creation of master files Conversion of data from legacy systems & building interfaces Training costs Education and training of personnel in use of the ERP system Consultancy fees given to outside professionals Implementation involves customization of the ERP package to suit the user requirements. This requires a thorough understanding of the technical aspects of the ERP package as well as the functional aspects of the business. The approach should be to have a concurrent Business Process Re-engineering (BPR) exercise during the ERP implementation. The focus should shift from business process improvement to technical improvement and vice-versa depending on the situation. Cases where focus would be more on business process improvement are: Traditional org. where improvements to business processes are required. Large customizations are necessary without improvement to business process High level of integration with other systems are required Multiple sites have to be implemented Cases where focus would be more on technical improvements are : Change-minded organization with firm decision making process Company operates according to common business practices. Improvements in business processes are not required immediately

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Chapter 2

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BIBLIOGRAPHY

Doe, John B. Conceptual Planning: A Guide to a Better Planet, 3d ed. Reading, MA: SmithJones, 1996.

Smith, Chris. Theory and the Art of Communications Design. State of the University Press, 1997.

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INDEX

Aristotle,3