CRITICAL SUCCESS FACTORS FOR THE IMPLEMENTATION OF ENTERPRISE RESOURCE PLANNING SYSTEMS IN MALAYSIA

CRITICAL SUCCESS FACTORS FOR THE IMPLEMENTATION OF ENTERPRISE RESOURCE PLANNING SYSTEMS IN MALAYSIA By SEYED MOHAMMADBAGHER JAFARI Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia, in Partial Fulfilment of the Requirement for the Degree of Master of Science October 2006

In dedication to: My dear parents, and my beloved brother and sister For all their encouragement, patience and support With love and gratitude ii

Abstract of thesis presented to the Senate of Universiti Putra Malaysia in partial fulfilment of the requirements for the degree of Master of Science CRITICAL SUCCESS FACTORS FOR THE IMPLEMENTATION OF ENTERPRISE RESOURCE PLANNING SYSTEMS IN MALAYSIA By SEYED MOHAMMADBAGHER JAFARI October 2006 Chairman : Ir. Mohd. Rasid bin Osman Faculty : Engineering Enterprise resource planning (ERP) systems as the last version of Manufacturing Resource Planning (MRP II) can be considered as the most important development in the corporate use of information technology and is beginning to be the backbone of organizations. The difficulties and high failure rate in implementing ERP systems have been widely cited in the literature. Factors affecting ERP implementation are complex and abundant. Numerous authors have identified a variety of factors that can be considered to be critical to the success of an ERP implementation. The objective of this research is to identify and evaluate the critical factors that affect ERP systems implementation success in Malaysia. The importance of these factors and the measures of a successful ERP system implementation have been investigated. These critical success factors (CSFs) were derived through a process that involved identification and synthesis of those critical requirements for implementation that have been recommended by practitioners and academicians iii

through an extensive review of the literature. Through this comprehensive review, ten factors were found to be critical to ERP implementation success: top management support, clear goals and objectives, communication, effective project management, business process reengineering, data accuracy and integrity, suitability of software and hardware, vendor support, education and training, and user involvement. By using questionnaire survey method, these factors were investigated in Malaysian companies in order to know their importance. A questionnaire including these criteria was formed to secure data from companies. To measure the importance of various critical factors, a five-point Likert scale was used in the questionnaire. Statistically the importance of the identified CSFs has been determined between Malaysian firms. Top management support and Clear goals and objectives have been shown to be the extremely important factors for ERP implementation in Malaysia. Case study review was conducted as a supplementary work to enhance the results of the survey. Data analysis showed that CSF is vital to ERP implementation and more awareness of CSFs leads to a more satisfied and successful ERP implementation. Moreover, the data analysis confirmed that more awareness of CSFs leads to more outcomes of ERP systems. This study proves the significance of CSFs in ERP implementation. The practical implications of this study are useful information about ERP systems situation in Malaysia. Recommendations from this study are useful for ERP vendors, iv

consultants and Malaysian companies that are implementing ERP or expecting to implement it to make certain their success. v

Abstrak tesis yang dikemukan kepada Senat Universiti Putra Malaysia sebagai memenuhi keperluan untuk ijazah Master Sains FAKTOR-FAKTOR KRITIKAL BAGI KEJAYAAN PELAKSANAAN SISTEM PELAN SUMBER KEUSAHAWANAN DI MALAYSIA Oleh SEYED MOHAMMADBAGHER JAFARI Oktober 2006 Pengerusi : Ir. Mohd. Rasid bin Osman Fakulti : Kejuruteraan Perancangan Sumber Perusahaan (ERP) sistem sebagai versi terakhir di dalam Perancangan Sumber Pembuatan (MRPII) boleh dianggap sebagai perkembangan terpenting di dalam penggunaan teknologi maklumat di sesebuah koporat dan merupakan tulang belakang bagi sesuatu orginasasi. Kadar kegagalan dan kesukaran yang tinggi di dalam memperkenalkan sistem ERP telah diperkenalkan di dalam literatur. Faktor yang mempengaruhi di dalam pelaksanaan sistem ERP adalah kompleks dan membebankan. Ramai penulis telah mengenalpasti pelbagai faktor yang boleh dianggap sebagai kritikal di dalam kejayaan bagi pelaksanaan sistem ERP. Objektif bagi kajian ini adalah untuk mengenalpasti dan menilai faktor- faktor kritikal yang mempengaruhi kejayaan di dalam pelaksanaan sistem ERP di Malaysia. Kepentingan faktor-faktor tersebut dan penilaian bagi kejayaan untuk pelaksanaan sesuatu sistem ERP telah juga dikaji. Faktor-faktor kritikal bagi kejayaan (CSFs) telah diperolehi melalui satu proses yang melibatkan pengenalpastian dan sintesis vi

keperluan kritikal bagi memperkenalkan faktor yang telah disyorkan oleh para akademik dan pengamal melalui kajian literatur yang menyeluruh. Melalui kajian ilmiah terperinci, sepuluh faktor kritikal dalam kejayaan pelaksanaan Sistem ERP telah dikenalpasti: Sokongan pengurusan atasan, matlamat dan objektif yang jelas, komunikasi, pentadbiran projek yang berkesan, proses kejuruteraan kembali perniagaan, integriti dan ketepatan data, kesesuaian perisian dan pekakas, sokongan pembekal, latihan dan pendidikan dan penglibatan pengguna. Melalui kaedah borang selidik, faktor-faktor berkenaan telah dikaji di dalam syarikat- syarikat tempatan bagi menentukan kepentingannya. Borang soal selidik tersebut mengandungi elemen kriteria berkenaan telah dibentuk untuk mendapatkan data daripada syarikat berkenaan. Bagi menilai kepentingan pelbagai faktor kritikal tersebut, satu skala Likert lima-mata telah digunakan di dalam borang soal selidik. Melalui kaedah statistik, kepentingan CSFs telah dikenalpasti di antara firma-firma Malaysia. Sokongan pengurusan atasan dan matlamat dan objektif yang jelas telah dikenalpasti sebagai faktor yang terpenting di dalam pelaksanaan ERP di Malaysia. Tinjauan semula kes penyelidikan telah dilaksanakan sebagai kerja tambahan untuk mempertingkatkan mutu hasil-hasil kajian. Analisis data menunjukkan bahawa CSFs sangat penting dalam pelaksanaan ERP dan kesedaran yang lebih banyak dalam CSFs akan membawa kepada kepuasaan dan kejayaan yang tinggi dalam pelaksanaan ERP. Selain itu, data analisis mengesahkan bahawa jika lebih banyak perhatian diberi kepada CSFs akan membawa kepada kejayaan pelaksanaan sistem ERP yang lebih tinggi. Kajian ini telah menunjukkan kepentingan CSFs di dalam pelaksanaan ERP. vii

Implikasi secara praktikal daripada kajian menunjukkan maklumat penting mengenai situasi sistem ERP di Malaysia. Cadangan daripada kajian ini sangat berguna bagi pembekal ERP, perunding dan syarikat di Malaysia yang sedang melaksanakan ERP atau bercadang untuk melaksanakan sistem ini bagi membantu kejayaan syarikat mereka. viii

ACKNOWLEDGEMENTS All the praise to Allah the Al-Mighty for his blessing and benevolence I wish to express my sincere gratitude and appreciation to the numerous individuals who have contributed towards the completion of this thesis: To my supervisor, Ir. Mohd. Rasid bin Osman, and other members of the supervisory committee: Associate Professor Dr. Rosnah Mohd. Yusuff and Dr. Tang Sai Hong, for their invaluable advice, supervision and assistance during this research. Their encouragement, moral and technical support made this work possible. To SMIDEC, Malaysian companies and all other individuals that contributed directly or indirectly in this research. To all staff in the Department of Mechanical & Manufacturing Engineering, UPM. To all my friends in UPM and in Malaysia for all their moral support. To all of Iranian and overseas students who involved directly or indirectly towards the success of this research. To my dear parents and my beloved brother and sister, for their warm encouragement, patience, love and support. Thank you for all your contributions. May Allah bless you all. ix

I certify that an Examination Committee has met on 6 th of October 2006 to conduct the final examination of Seyed Mohammadbagher Jafari on his degree thesis entitled Critical Success Factors for the Implementation of Enterprise Resource Planning Systems in Malaysia in accordance with Universiti Pertanian Malaysia (Higher Degree) Act 1980 and Universiti Pertanian Malaysia (Higher Degree) Regulations 1981. The Committee recommends that the candidate be awarded the relevant degree. Members of the Examination Committee are as follows: Shamsuddin Sulaiman, PhD Associate Professor Faculty of Engineering Universiti Putra Malaysia (Chairman) Wong Shaw Voon, PhD Associate Professor Faculty of Engineering Universiti Putra Malaysia (Internal Examiner) Ir. Mohd. Yusof Ismail, PhD Associate Professor Faculty of Engineering Universiti Putra Malaysia (Internal Examiner) Haji Baba Mohd. Deros, PhD Lecturer Faculty of Engineering Universiti Kebangsaan Malaysia (External Examiner) HASANAH MOHD. GHAZALI, PhD Professor/ Deputy Dean School of Graduate Studies Universiti Putra Malaysia Date: x

This thesis submitted to the Senate of Universiti Putra Malaysia and has been accepted as partial fulfillment of the requirements for the degree of Masters of Science. The members of the Supervisory Committee are as follows: Ir. Mohd. Rasid Osman Lecturer Faculty of Engineering Universiti Putra Malaysia (Chairman) Rosnah Mohd. Yusuff, PhD Associate Professor Faculty of Engineering Universiti Putra Malaysia (Member) Tang Sai Hong, PhD Lecturer Faculty of Engineering Universiti Putra Malaysia (Member) AINI IDERIS, PhD Professor/Dean School of Graduate Studies Universiti Putra Malaysia Date: 16 JANNUARY 2007 xi

DECLARATION I hereby declare that the thesis is based on my original work except for quotations and citations, which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other degree at UPM or other institutions. SEYED MOHAMMADBAGHER JAFARI Date: xii

TABLE OF CONTENTS Page DEDICATION ABSTRACT ABSTRAK ACKNOWLEDGEMENTS APPROVAL DECLARATION LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS ii iii vi ix x xii xvi xviii xix CHAPTER 1 INTRODUCTION 1 1.1 Introduction 1 1.2 Problem Statement 3 1.3 Research Objectives 8 1.4 Significance of Study 9 1.5 Layout of Thesis 9 2 LITERATURE REVIEW 11 2.1 ERP 11 2.2 ERP Systems Modules 13 2.3 The Evolution of ERP 15 2.4 ERP Systems Software 20 2.5 Strategic Reasons for ERP Systems Implementation 23 2.6 ERP Systems Implementation Models 28 2.6.1 The Parallel Approach 29 2.6.2 Big Bang 30 2.6.3 The Phased Approach 31 2.7 ERP Systems Implementation Issues 33 2.8 Critical Success Factors Method 43 2.9 ERP Implementation Process 44 2.10 ERP Systems Success Measures 46 2.11 Proposed Critical Success Factors 49 2.11.1 Top Management Support 56 2.11.2 Clear Goals and Objectives 58 2.11.3 Communication 60 2.11.4 Effective Project Management 61 2.11.5 Business Process Reengineering 63 2.11.6 Data Accuracy and Integrity 65 2.11.7 Suitability of Software and Hardware 66 2.11.8 Vendor Support 68 2.11.9 Education and Training 69 2.11.10 User Involvement 71 2.12 Conclusion 72 xiii

3 METHODOLOGY 74 3.1 Introduction 74 3.2 Identify Success Measures and Critical Success Factors 76 3.3 Design of Survey and Questionnaire 77 3.4 Instrument Validity and Pilot Test 79 3.5 Survey Population 80 3.6 Distribution and Collection of Questionnaires 81 3.7 Survey Data Analysis 82 3.8 Case Study 82 3.9 Implementation of Case Study 83 3.10 Case Study Data Analysis 83 3.11 Conclusion 83 4 RESULTS AND DISCUSSION 84 4.1 Survey Response Rate 84 4.2 Instrument Validation 84 4.2.1 Content Validity 84 4.2.2 Reliability 84 4.3 Section A: Company Background 87 4.3.1 Company Name 87 4.3.2 Category of Company 87 4.3.3 Type of Industry 88 4.3.4 Number of Employees 89 4.3.5 Respondent s Position 90 4.4 Section B: ERP System Specification 91 4.4.1 Implementation Stage 91 4.4.2 ERP Software 93 4.4.3 Installed Modules 94 4.4.4 Implementation Duration 96 4.5 Section C: Implementation Specification 98 4.5.1 Planned Time 98 4.5.2 Planned Budget 99 4.5.3 Overall Satisfaction 99 4.5.4 Original Expectations 100 4.5.5 General Outcome 101 4.6 Section D: Critical Success Factors 102 4.6.1 Top Management Support 102 4.6.2 Clear Goals and Objectives 104 4.6.3 Communication 105 4.6.4 Effective Project Management 106 4.6.5 Business Process Reengineering 107 4.6.6 Data Accuracy and Integrity 108 4.6.7 Suitability of Software and Hardware 109 4.6.8 Vendor Support 110 4.6.9 Education and Training 111 4.6.10 User Involvement 112 4.6.11 Total Ranking 113 4.7 Case Study Results 114 4.7.1 Background of the Case Companies 114 xiv

4.7.2 Cross Case Examination on ERP Implementation 116 Aspects among the Case Companies 4.7.3 Cross Case Examination on CSFs among the Case Companies 119 4.8 Discussion 125 4.8.1 ERP Implementation Process and Success 125 Measures 4.8.2 The CSFs Importance Degree 129 4.8.3 The Comparison between CSFs Importance Degree 132 and their Ranking 4.8.4 The CSFs and Satisfaction Rate 133 4.8.5 The CSFs and General Outcome 135 4.9 Conclusion 136 5 CONCLUSIONS AND RECOMMENDATIONS 137 5.1 Conclusions 137 5.2 Recommendations for Companies Implementing ERP 139 Systems 5.3 Recommendations for Future Research 140 REFERENCES 141 APPENDICES 149 BIODATA OF THE AUTHOR 158 xv

LIST OF TABLES Table Page 2.1 The revenue of ERP systems vendors in 2003 and 2004 23 2.2 ERP success measures mentioned in the literature 48 2.3 Critical success factors mentioned in the literature 51 4.1 Reliability analysis 86 4.2 Type of industry 89 4.3 Implementation project stage 92 4.4 ERP software implemented 92 4.5 Category of company vs. ERP software 93 4.6 Installed modules 94 4.7 Installed modules vs. category of company 95 4.8 The duration of implementation project 97 4.8.1 The duration of implementation project vs. category of company 97 4.9 Implementation project on-time situation 98 4.10 Implementation project expenses situation 99 4.11 Overall satisfaction 100 4.12 Original expectation of ERP implementation 101 4.13 General outcome of ERP implementation 102 4.14 Top management support 103 4.15 Clear goals and objectives 104 4.16 Communication 105 4.17 Effective project management 107 xvi

4.18 Business process reengineering 108 4.19 Data accuracy and integrity 109 4.20 Suitability of software and hardware 110 4.21 Vendor support 111 4.22 Education and training 112 4.23 User involvement 123 4.24 Total CSFs ranking 114 4.25 Background of the case companies 115 4.26 Comparison on the major aspects of ERP system implementation by each 117 case company 4.27 Over time implementation vs. satisfaction rate 126 4.28 Over budget implementation vs. satisfaction rate 127 4.29 Average rating of CSFs by degree of importance 129 4.30 The coefficient of variance of CSFs 132 4.31 Comparison between the mean of CSFs importance degree and ranking 133 4.32 Correlation coefficient between CSFs mean and satisfaction rate 135 4.33 Correlation coefficient between CSFs mean and general outcome 136 5.1 CSFs average by degree of importance 138 xvii

LIST OF FIGURES Figure Page 2.1 An ERP System s Modules 14 2.2 Production Planning within MRP II 17 2.3 Conceptual Framework of ERP II 19 2.4 ERP Evolution 20 2.5 The ERP systems vendors market share revenue in 2004 21 2.6 The Parallel Approach 30 2.7 Big Bang Approach 31 2.8 The Phased Approach 32 2.9 The Summary of ERP Systems Investment 36 2.10 The ERP Implementation Process 46 3.1 Flowchart of the Research 75 4.1 Category of Companies 88 4.2 Number of Employees 90 4.3 Respondent s Position 91 4.4 Number of Installed Modules 96 4.5 Order of CSFs by Degree of Importance 131 4.6 CSFs Mean vs. Satisfaction Rate 134 4.7 CSFs Mean vs. General Outcome 136 xviii

LIST OF ABBREVIATIONS AI APICS BPR B2B B2C B2E CIO CV CPM CRM CSF DW EAI EIU ELM ERP ICT IS IT MIS MITI MPS MRP MRP II Artificial Intelligence American Production and Inventory Control Society Business Process Reengineering Business-to-Business Business-to-Consumer Business-to-Employee Chief Information Officer Coefficient of Variance Corporate Performance Management Customer Relationship Management Critical Success Factor Data Warehousing Enterprise Application Integration Economist Intelligence Unit Employee Lifecycle Management Enterprise Resource Planning Information & Communication Technology Information Systems Information Technology Management Information Systems Ministry of International Trade & Industry Master Production Schedule Material Requirement Planning Manufacturing Resource Planning II xix

PLM PSA RFID SCM SME SMI SMIDEC SOA SPSS SRM Product Lifecycle Management Professional Service Automation Radio Frequency Identification Supply Chain Management Small and Medium Enterprise Small and Medium Industries Small and Medium Industries Development Corporation Service-Oriented Architecture Statistical Package for Social Science Supplier Relationship Management xx