Factor impacting ERP implementation success in Vietnam

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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY LE THI KIM THOA FACTORS IMPACT ERP IMPLEMENTATION SUCCESS IN VIETNAM MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.34.05 MASTER OF BUSINESS ADMINISTRATION THESIS SUPERVISOR: DR. DINH CONG KHAI HO CHI MINH CITY- 2011 ACKNOWLEDGEMENT I would like to thank my thesis advisor Dr Dinh Cong Khai for all his intensive support, valuable suggestions and encouragement during the writing process. I would like to show our gratitude to the respondents for taking time to participate in my survey. Without your answers, this thesis would not have been possible. I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Graduate Faculty, University of Economics Ho Chi Minh City for their teaching and guidance during my MBA course. I would like to specially express my thanks to all of my classmates, my friends and Mr Dang Huu Phuc for their support and encouragement. Ho Chi Minh City, 2011-02-05 Le Thi Kim Thoa 2 Abstract Master Thesis in Business Administration, Summer 2011 Economics University Ho Chi Minh City The enterprise resource planning (ERP) system provides support for core organizational activities such as manufacturing and logistics, finance and accounting, sales and distribution, and human resources. An ERP system helps different parts of an organization share data and knowledge, reduce costs, and improve business management. A large number of Vietnamese enterprises would like to apply ERP system, but many are not successful in their ERP implementation projects. There are quite a number of the factors that affect the success of ERP implementation project. The aim of this research is to explore factors that influence ERP implementation success in the Vietnamese context, which will help both implementing companies and consulting companies get success for ERP implementation in Vietnam. Both qualitative and quantitative approaches were considered in this research. First, the qualitative research is conducted through making in-depth interview with five managers in ERP implementing companies to check the content and meanings of words using in the measurements scales. Then the main research is quantitative with 200 key users who use ERP system in their daily activities via email and phone to get results. The Cronbach‟s alpha is used to measure reliability, the Exploratory Factor Analysis attempts to identify underlying variables and regression analysis is used to test the research model and hypotheses. The result confirms that master data quality, minimal customization, Business Process Reengineering (BPR), management, education and training, consulting factors have positive impacts on ERP implementation success. Therefore, the benefit of this study will help consulting companies and implementing companies focus on these critical factors when they want to apply ERP system in Vietnam and reduce as much as possible potential risks. 3 Key words: ERP, project success, resource management, business process reengineering, management, education and training, consulting, customization, SAP, Oracle. 4 Contents Page CHAPTER 1: INTRODUCTION ...................................................................................8 1.1 The problem statement ....................................................................................8 1.2 Research questions ....................................................................................... 11 1.3 Research objectives ...................................................................................... 11 1.4 Research methodology .................................................................................. 11 1.5 Scope of the study ........................................................................................ 12 1.6 Structure of the study .................................................................................... 12 CHAPTER 2: REVIEW OF RELEVANT LITERATURE ............................................... 13 2.1 Key Concepts .............................................................................................. 13 2.2 ERP implementation success ......................................................................... 14 2.3 Review of Critical Success Factors (CSFs) in ERP implementation .................... 16 2.3.1 Master data quality............................................................................. 16 2.3.2 Minimal customization ....................................................................... 17 2.3.3 Business Process Re-engineering (BPR) ............................................... 17 2.3.4 Consultants ....................................................................................... 18 2.3.5 Management ..................................................................................... 18 2.3.6 Education and Training ...................................................................... 19 Research Model ........................................................................................... 20 2.4 2.4.1 Variables and Hypotheses ................................................................... 20 2.4.2 A suggested research model ........................................................... 23 CHAPTER 3: RESEARCH METHODOLOGY ............................................................. 24 Research methodology ..................................................................................... 24 3 3.1.1 The pilot research .............................................................................. 24 3.1.2 The main research .............................................................................. 25 3.1.3 The scales ......................................................................................... 25 3.1.4 The questionnaire .............................................................................. 26 3.1.5 Measurement..................................................................................... 27 3.1.6 Data collection .................................................................................. 27 3.1.7 Population and sampling ..................................................................... 28 CHAPTER 4: RESULTS AND DISCUSSION OF THE FINDINGS ................................ 29 4.1 Descriptive statistics ..................................................................................... 29 4.2 Cronbach‟s Alpha Analysis ........................................................................... 31 4.3 EFA Analysis ............................................................................................. 31 5 4.4 Regression analysis ...................................................................................... 36 CHAPTER 5: CONCLUSIONS AND IMPLICATIONS ................................................. 42 5.1 Conclusions of the research ........................................................................... 42 5.2 Implications of the research ........................................................................... 42 5.3 Limitations and suggestion for further researches ............................................. 43 REFERENCES .......................................................................................................... 45 APPENDIX ............................................................................................................... 48 6 LIST OF TABLES & FIGURES Table 4.1: Demographic statistics of the respondents .................................................... 29 Table 4.2: Descriptive statistics .................................................................................. 30 Table 4.5: KMO and Bartlett‟s Test ............................................................................ 31 Table 4.3: Cronbach‟s Alpha of all variables ............................................................... 32 Table 4.4: Cronbach‟s Alpha of business process re-engineering after removing variable V33 ........................................................................................................................ 33 Table 4.6: Total Variance Explained ........................................................................... 34 Table 4.7: Rotated Component Matrix ........................................................................ 35 Table 4.8: The final measurement scale....................................................................... 36 Table 4.9: Regression analysis on data of 107 responses ............................................... 37 Table 4.10: Results ................................................................................................... 41 7 CHAPTER 1: INTRODUCTION 1.1 The problem statement ERP stands for Enterprise Resource Planning. Before 1970s, this concept did not exist. At that time, there were only a few software products that handled processing data in real time and saved it in a central database. At the beginning of 2003, the concept of an ERP system was redefined. It is no longer a system with a database; instead, it is a combination of products covering basic functions such as purchasing, sales, production, and finance. In the areas of human resources, accounting, and basis technology, it corresponds to enhance solutions of the new dimension products (SAP overview). Enterprise resource planning (ERP) is an integrated computer-based system used to manage internal and external resources including tangible assets, financial resources, materials, and human resources. It is a software architecture of which purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders. Built on a centralized database and normally utilizing a common computing platform, ERP systems consolidate all business operations into a uniform and enterprise wide system environment (Bidgoli et al, 2004). ERP software automates core corporate activities such as purchasing, inventory, manufacturing, sales and distribution, human resource, finance, and supply chain management, etc., by incorporating the best practices to facilitate rapid decision-making, cost reductions, and greater managerial control. After joining WTO (World Trade Organization), Vietnamese enterprises have faced a lot of challenges and opportunities. In order to achieve greater flexibility, ERP has 8 been introduced to Vietnamese enterprises. Implementing ERP helps companies increase competitiveness by reducing cost, better controlling organization resources, making timely decision. The use of ERP has also been found to be critical in improving customer satisfaction. For example, NEC Technologies credits its installation of ERP for increasing its speed of order processing, improving invoicing and drastically reducing its customerservice response times (Michel, 1997). In addition, ERP has also been credited with reducing manufacturing lead times (Goodpasture, 1995). Although ERP is a large and helpful software, it is expensive to implement. Thus, enterprises expect a lot whenever they decide to implement it. They hope ERP could assist them in reducing manual work, making provision easier and timely access to accurate information, improving reports, fastening system response time, enhancing procurement, planning, controlling sales cycle and approval functions, providing relevant tools for managerial accounting control and profitability analysis, and responding faster to the dynamic market changes. Specially, in globalization, ERP is a key and essential tool in management that supports enterprises to go global. According to VCCI, by the mid-year of 2006, there were only 1.1% Vietnamese enterprises applying ERP. However, the number of Vietnamese enterprises applying ERP has risen up significantly currently. According to FIS-ERP - a consulting company, to install ERP system, Sino Pacific Construction Consultancy Co. spent more than 1 million USD, Thep Viet paid more than 2 million USD, Nova group paid 1 million USD, Pham Nguyen company paid more than $500.000, Vietin bank paid 4.3 million USD. 9 Since ERP is so expensive, although many enterprises want to apply ERP but they have some concerns whether they should apply it. Some enterprises such as Vietnam Electricity Corporation, Phong Phu Corporation intended to apply ERP 3 years ago, but till now they have not applied it. There are several reasons why these firms are not rushing to install the systems. Firstly, the ERP implementation efforts of many larger counterparts have resulted in partial failure, or in some cases total abandonment. The other reason is a lack of financial resources, which restrains them to implement the typically expensive ERP system. It was reported that 40 percent of all ERP installations were partially implemented and that nearly 20 percent were scrapped total failures. Especially for Vietnamese firms, with their limited resources they are less likely to survive or quickly overcome a failed ERP implementation. Most of the times, implementation of an ERP system will require more effort than an initial plan. An ERP implementation failure may lead to a big problem to a firm as this will waste enormous sums of money, labor, and destroy competitive advantage of the firm. There are many researches about critical factors impacting ERP project‟s success in foreign companies. Bingi, et al. (1999) found the common critical success factors (CSFs) of ERP Implementation in ten criteria: top management commitment, reengineering, integration, ERP consultants, implementation time, implementation costs, ERP vendors, selecting the right employees and training employees. In order to evaluate impacts of factors on success in ERP implementation in Vietnam, Giang (2009) identified these factors: ERP package selection, communication, process management, training and education, project management, legacy system management, system integration, system testing, cultural and structural changes. 10 However in his research Giang used the case study methodology therefore the numbers of chosen cases may not be representative or typical. This research is also a study about ERP implementation success factors but using the Exploratory Factor Analysis (EFA) and regression analysis to get results. 1.2 This Research questions paper attempts to determine “What major factors impact ERP implementation success in Vietnam?” 1.3 Research objectives The objective of the research is to identify critical factors that affect ERP implementation in the Vietnamese context. The lessons withdrawn from this study would be useful for consulting and implementing companies in their efforts to successfully implement an ERP system in Vietnam. 1.4 Research methodology The purpose of this research is to identify the CSFs for ERP implementation in Vietnam by using the EFA method, hence both pilot research and quantitative research are considered. The pilot research is conducted by making an in-depth interview with five managers in some ERP implementing companies in Ho Chi Minh city in order to get their ideas about success factors and meaning of words using in the questionnaires. The questionnaire is adapted from the literature and the field visits, as well as the comments gathered from the interviews. In the next step, the sample is collected by sending questionnaires to the relevant people who took part in the ERP implementation, such as key-users, end-users, developers and team members of the ERP projects. Individuals are asked to indicate the extent of agreement or disagreement with the questionnaire items 11 concerning ERP systems on a five-point Likert-type scale ranging from 1 (strongly disagree) to 5 (strongly agree). After collecting data, the measurement scales will be verified by using the Cronbach‟s alpha ratio and the Exploratory Factor Analysis (EFA) is used to refine the measurement scales. Finally, the hypotheses are tested by using regression analysis. 1.5 Scope of the study Due to the limit of time and financial budget, the research cannot cover al l the ERP applying companies in Vietnam. Based on the list of firms that implemented ERP in Vietnam, there are about one hundred ERP implementing firms and most of them have head office in Ho Chi Minh City. Thus, the sampling covers companies working in different activities and located in Ho Chi Minh City, Vietnam. There are a lot of ERP suppliers such as: SAP, Oracle, PeopleSoft, Invensys, ABB Automation, i2, SSA Global Technologies, Intentia International, Epicor... But, this paper concentrates on two leading ERP solutions providers which are SAP and Oracle only. 1.6 Structure of the study The structure of this study includes 5 chapters. Chapter 1 presents information about the problem statement, research question, research objectives, research methodology and scope of the study. Chapter 2 discusses concepts of terms and literature review of ERP success factors. Chapter 3 explains research methodology and research model that are used in the study. Chapter 4 analyzes the result and discussion of the findings. And finally, conclusions and implications are presented in Chapter 5. 12 CHAPTER 2: REVIEW OF RELEVANT LITERATURE This chapter is to focus on introducing the literature review in order to establish a research model. There are four parts. The first one will introduce some key concepts about ERP; the second one will discuss about ERP implementation success; the next one will review some critical success factor; and the last one will suggest the research model and the hypotheses about the impact of major factors on ERP implantation in the Vietnamese context. 2.1 Key Concepts Since we are dealing with the subject of Enterprise Resource Planning, this is the key concepts in the study. Kumar et al. (2000) defined Enterprise Resource Planning (ERP) systems as configurable information system packages that integrate information and information-based processes within and across functional areas in an organization. O‟Leary (2000) also defined that “ERP systems are computer-based systems designed to process an organization‟s transactions and facilitate integrated and real-time planning, production, and customer response.” According to him, ERP systems have the following characteristics: (i) ERP systems are packaged software designed for a client server environment, whether traditional or web-based; (ii) ERP systems integrate the majority of a business processes; (iii) ERP systems process a large majority of organizational transactions; (iv) ERP systems use an enterprise-wide database that typically stores each piece data once; (v) ERP systems allow access to the data in real time; (vi) In some cases, ERP allows an integration of transaction processing and planning activities (e.g., production planning). Zeng et al. (2003) thought that an ERP system should be: (i) Flexible: An ERP system has to be able to 13 react to changing needs that an organization can have in future. This is facilitated by the fact that ERP systems are constructed on client/server technology that makes it possible to run them on various database servers; (ii) Comprehensive: An ERP system should be able to support a variety of organizational processes. Consequently, ERP systems cover different modules; (iii) Modular and open: An ERP system ought to allow any module to be interfaced or disconnected whenever needed without disrupting other modules; (iv) Beyond the company: A good ERP system is not restricted by the organizational boundaries, it should support connection to entities outside the organization. 2.2 ERP implementation success Kyung et al. (2001) showed that while some firms announced ERP implementation success, many others reported negative results of ERP implementation. An ERP implementation failure may be fatal to a firm: either wasting enormous sums of money or destroying the competitive advantage of the firm. To manage ERP implementation successfully, a high level ERP implementation success measure is required. Markus et al. (2000) argued that a minimum set of success metrics included project metrics, early operational metrics, and long-term business results. To answer the question “what makes ERP implementation so unsuccessful?” Swan et al. (1999) argued that the root of such high failure rate is the difference in interest between customer organizations who desire unique business solutions and ERP vendors who prefer a generic solution applicable to a broad market. He also suggested that the organizational fit of ERP might be worse in Asia, because the reference 14 process model underlying most ERP system is influenced by European or US industry/business practices, which are different from Asian business practices. In this study, the author defines ERP implementation success from ERP implementation project perspective. ERP implementation success, the dependent variable in the study, is not evaluated by the general users but by ERP project team members. Implementation project success is frequently defined in terms of the achievement of some predetermined goals, which normally include multiple parameters such as time, cost, and performance. The author measured ERP implementation success in terms of the perceived deviation from the expected project goals such as cost overrun, schedule overrun, system performance deficit, and failures to achieve the expected benefits. According to Roger (2004), in project there are usually three distinct objectives: cost, schedule, and performance. The project cost is the sum of direct and allocated cost assigned to the project. The project manager and project team‟s job is to control those costs that are directly controllable by the project organization. Normally, the project will have a project budget, which includes costs assigned to the project. The second objective in managing project is schedule. Frequently, a project completion date and intermediate milestones are established at the outset. Just as the project team/manager must control the project cost within budget, they must also control the schedule to meet established dates. The budget and schedule often conflict to each other. For example, if the project is behind schedule, more time may be needed to bring it back on. But there may be insufficient funds in the budget to support the overtime costs. Therefore, a trade-off decision between time and cost must 15 be made. Management must determine whether the schedule objective is of sufficient importance to justify and increased cost. The third objective is performance, that is, the performance characteristics of the product or service being produced by the project. Performance for a service project, such as ERP project, is ordinarily much more difficult to specify than for a manufactured product. Performance may also require trade-offs with both schedule and cost. Performance requirements may, in turn, cause cost and schedule changes. Since it is rarely possible to predict performance, schedule, and cost requirements accurately before a project begins, numerous trade-offs may be required while the project is under way. 2.3 Review of Critical Success Factors (CSFs) in ERP implementation There are several researches about critical factors influencing ERP implementation. ERP implementation issues have been caught attention because it is very expensive but low implementation success. The purpose of this paper is to investigate the factors impact on ERP implementation project in Vietnam. This research will review some researches relevant to the study. Understanding such effects may enable not only ERP implementing companies but also domestic consulting companies to be more proactive in planning and implementing ERP in the country. 2.3.1 Master data quality Master data quality is crucial for an ERP system‟s success. There are different names of master data quality, but the meaning is rather similar. For example, Somers et al. (2001) used data analysis and conversion, Zhang et al. (2002) used data accuracy. In this thesis, the author decided to use master data quality, which means data loaded 16 from existing legacy systems or documents must be of high quality. Timely and accurate data in a single consistent format is thought a fundamental requirement for the effectiveness of ERP system implementation. This factor has been considered critical by Shanks et al. (2000); Somers et al. (2001); Umble et al. (2003); Zhang et al. (2002); Jiang (2005); Yusuf et al. (2006), Yizi (2007). 2.3.2 Minimal customization Minimal customization which involves using the vendor‟s code as much as possible even if this means sacrificing functionality has been associated with successful ERP implementations. Because customizations are usually associated with increased information systems costs, longer implementation time, and the inability to benefit from vendor software maintenance and upgrades, customization should only be requested when the competitive advantage derived from using non-standard processing can be clearly demonstrated. Customization factor is mentioned by Bingi et al. (1999); Parr et al. (2000); Shanks et al. (2000); Nah et al. (2001); Somers et al. (2001 and 2004); Jiang (2005); Zhang et al. (2002); Zhou-Sivunen (2005). 2.3.3 Business Process Re-engineering (BPR) Business process re-engineering (BPR) is defined by as “the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed”. Implementing an ERP system involves reengineering the existing business processes to the best business process standard. One of the main reasons why ERP and other large technologically sophisticated systems fail is that organizations simply underestimate the extent to which they have to change and re-engineering the existing 17 business processes in order to accommodate their purchase. ERP systems are built on best practices that are followed in the industry. All the processes in a company must conform to the ERP model. This factor is reviewed by Bingi et al. (1999); Parr et al. (2000); Shanks et al. (2000); Nah et al. (2001); Somers et al. (2001 and 2004); Jiang (2005); Zhang et al. (2002); Zhou-Sivunen (2005). 2.3.4 Consultants Consultants play an important role in ERP implementation. Specially, when ERP is very new in Vietnam, almost Vietnamese consultants have low experience in ERP segment. Thus, three dimensions of vendor support are classified: (1) Qualified consultants with knowledge in ERP system; (2) Qualified consultants with knowledge in enterprises‟ business processes; and (3) Consulting skills in ERP implementation. It‟s important for the consultants to be knowledgeable in both business processes and ERP system functions. Also, the consultants should possess good interpersonal skills and be able to work with people. They have experiences to help a company implement the ERP system during the whole ERP implementation process and after the implementation phase. This factor is discussed as one of the factors which impact the ERP implementation success by researchers Bingi et al. (1999); Parr et al. (2000); Zhou-Sivunen (2005); Yusuf et al. (2006). 2.3.5 Management Many studies have emphasized the importance of management as a necessary factor in successful ERP implementation. As ERP is a highly integrated information system, it requires the complete cooperation of staff members from all segments of the business. Management in project must create an environment for implementing an 18 ERP system to gain the expected results and must be seen as a participant in the implementation. Management in ERP implementation has two main facets: (1) providing leadership; and (2) providing the necessary resources. To implement an ERP system smoothly and successfully, companies require a steering committee to participate team meetings and monitor the implementation efforts, spend time with people and provide clear directions of the project. Willingness to provide the necessary resources is another indicator of top management commitment to the ERP project. The implementation could be seriously handicapped if some of the critical resources (e.g., people, funds and equipment) are not available. This factor is discussed by Bingi et al. (1999); Holland and Light (1999); Sumner (1999); Gupta (2000); Sarker and Lee (2000); Rao (2000); Huang and Palvia (2001); Aladwani (2001); Chen (2001); Dong (2001); Soliman et al. (2001); Nah et al. (2001); Krammergaard and Rose (2002). 2.3.6 Education and Training Education and training refers to the process of providing management and employees with the logic and overall concepts of ERP system. Thus, people can have a better understanding of how their jobs are related to other functional areas within the company. The user is people who produce results and should be held accountable for making the system performance meet expectations. ERP system was not easy to use, adequate training and education would help employees to use the ERP system much easier. This factor is presented by researchers Bingi et al. (1999); Sumner (1999); Gupta (2000); Rao (2000); Rao (2000); Zhang et al. (2001); Mabert et al. (2001); Aladwani (2001); Al-Mashari (2002); Kuruppuarachchi et al. (2002); Gyampah and Salam (2003); Umble et al. (2003); Voordijk et al. (2003). 19 2.4 Research Model 2.4.1 Variables and Hypotheses 2.4.1.1 The dependent variable In this research, the dependent variable is ERP implementation project‟s success. In the literature review, ERP implementation success can be measured by cost, time and performance. If the project is behind schedule, overtime may be needed to bring it back on. But there may be insufficient funds in the budget to support the overtime costs. So a trade-off decision between time and cost must be made. And performance may also require trade-offs with both schedule and cost. So, the dependent variable in this study is frequently defined in terms of the achievement of some predetermined goals, normally include parameters as mentioned in the literature review: cost, schedule, performance and trade-off between them. However, as cost is sensitive, confidential and further more users do not know about project cost, so the author measures ERP implementation success in terms of schedule overrun and system performance. 2.4.1.2 Independent variables and hypotheses Independent variables represent the treatments or conditions that the researcher has either direct or indirect control over to test their effects on a particular outcome. In this research, the independent variables include implementation success factors as mentioned in the literature review which are master data quality, minimal customization, business process reengineering, consulting, management and education and training. 20
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