University of Groningen MSc Business Administration
Specialization: Organizational & Management Control
The interface between management control and
enterprise resource planning systems in SME context
Daniël Pieter Schut S1199048 Dwangsweg 27
9635 TV Stootshorn (Noordbroek) d.p.schut@student.rug.nl
Supervisor: dr. K. (Kristina) Linke (k.linke@rug.nl) Co-assessor: dr. B. (Ben) Crom (b.crom@rug.nl)
May 2016
Abstract
In recent years we have seen the emergence of ERP systems, which can be used to manage and coordinate all the resources, information and functions of a company. In the research field, few empirical findings are available on the research interface between ERP and management control. Researchers aim at setting a conceptual distinction between the ERP system implementation phase and the usage phase. This research tries to contribute to the scarcity in the research field and follows the case study of Teittinen et al. (2012). The case company is of SME size, using an ERP system other than SAP for a period of two years. Challenges and benefits for management control regarding the ERP system in use are received from interviews with people at different organizational levels at the case company. On strategic level, the management control expectations using ERP are met regarding standardization and formalization of business processes. The process of retrieving strategic management control information from ERP seems a big challenge to overcome – monthly reporting, purely financial, is only representing this. On operational level the ERP system is working adequate, albeit with the presence of a MES-system. The MES-system divides the production environment from the office environment, and seems to reduce operational production errors by transferring only relevant production data to ERP. A challenge on operational control is the need of local subsystems, as ERP does not contain all information needed.
Keywords: enterprise resource planning systems, management control systems, ERP, MCS, organization, performance,
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Preface
This master thesis, titled The interface between management control and enterprise resource
planning systems in SME context, is the last step in completing the master of Business
Administration, specialization Organizational and Management Control, at the University of Groningen.
First of all, I would like to thank dr. K. Linke for her supervision during the time I worked on my thesis. The process of writing my thesis was a path of trial and error. I wrote it in the evening hours and weekends, because I work fulltime during the week. This was one of the reasons why it took me some years to finish writing my thesis. I would also like to thank dr. B. Crom for his co-supervision. During the meeting we had in February 2016, he opened my eyes in finishing my master thesis and put me on the right track.
Secondly, I would like to thank my boss, Leen van der Sluis. During the years he gave me several opportunities to take a week study leave, although this did not always fit into the work agenda. Furthermore, he gave me the opportunity to use the company I work for, ChemCom Industries B.V., as a case company in this master thesis. In addition, I would like to thank some colleagues who were interviewed for this thesis.
Thirdly, I would like to thank Kees Spiering who has edited my thesis. Kees has a professional background as an English teacher and also as a writer. With his editorial work he increased the language technical level of my thesis.
Finally, I would like to thank my friends and family for their support during my student days and in writing this thesis. Especially my girlfriend Simone, who does not know me otherwise then studying alongside my professional work. This thesis will officially end my college days and we are looking forward to spending more time on other pursuits that make life worth living.
Daniël Schut,
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Content
Preface ... 2 1. Introduction ... 4 2. Literature ... 5 2.1 Management accounting ... 6 2.2 Management control ... 6 2.3 ERP systems ... 7 2.3.1 Visible effects ... 8 2.3.2 Invisible effects ... 9 3. Methodology ... 11 3.1 Case organization ... 113.2 Research method and data collection ... 13
4. Results ... 16
4.1 The benefits of ERP for the case company ... 16
4.1.1 User interface, standardization and integration ... 16
4.1.2 Production and office environment ... 18
4.2 The challenges of ERP for the case company ... 19
4.2.1 Management reporting ... 19
4.3 Relation to the research of Teittinen et al. (2012) ... 22
5. Discussion and conclusion ... 23
5.1 Discussion ... 23
5.2 Limitations and future research ... 27
References... 28
Appendix 1 – List of abbreviations ... 30
Appendix 2 – Interviewees ... 30
Appendix 3 – Interview questions ... 31
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1. Introduction
Information technology (IT1) has become increasingly important in business nowadays. Companies are constantly evolving, seeking new ways to improve their practices, increase their efficiency and profitability. To achieve this, companies are always looking for ways to organize data and communicate with (potential) customers, business partners and employees. Enterprise Resource Planning systems (ERPs) help companies doing this and therefore it is impossible to imagine today’s business without them. ERPs are organization-wide and integrated information systems that can be used to manage and coordinate all the resources, information and functions of a business from shared data stores. As ERPs are intended to integrate all corporate information into one central database, they allow all information to be retrieved from many different organizational positions and to make any organization visible (Dechow and Mouritsen, 2005). ERPs make almost all corporate and financial information visible. This poses challenges for management control. ERPs have the possibility to change the role of management control by providing management with easy and fast access to relevant and real-time operational data needed in decision-making and management control, in formal as well as informal controls (Chenhall, 2003). The main purpose of management control systems (MCS) is to monitor decisions throughout the organization and to guide employee behavior in desirable ways in order to increase the chances that an organization’s objectives, including organizational performance, will be achieved (Bhimani et al. 2008).
One of the central issues discussed in relation to ERPs is their role in enhancing management control and coordination given their emphasis on standardization and integration of business processes. A relatively small number of studies (Granlund, 2007) aim at problematizing and clarifying the complex and challenging nature of the relationship between ERP and management control questioning the assumption of a linear relationship between integration, information and control. Therefore, the effects on management control when companies use ERP have few empirical evidence. Those studies which have investigated this relationship (Granlund and Malmi, 2002; Caglio, 2003; Scapens and Jazayeri, 2003, Hyvönen et al., 2009) mainly focus on the implementation phase of ERP. Scarce are the empirical findings that are related to ERP systems in use, after the implementation phase, when the information processes, related work practices and the information contents can be seen as established (Dechow and Mouritsen, 2005; Grabski et al., 2009; Granlund, 2011). Several authors in the field (Teittinen et al., 2012; Dechow and Mouritsen, 2005; Quattrone and Hopper, 2006) aim at setting a conceptual distinction between system implementation and use.
The qualitative case study of Teittinen et al. (2012) aims at exploring and theorizing the benefits, challenges and problems for management control regarding an ERP system in use. The authors study their case company which has had an ERP system in use for four years. The research findings are constructed from viewpoints of people at different levels and in different functions within the organization. In addition, earlier research regarding ERPs has mainly focused on big multinational companies with mostly the SAP ERP system being studied. Teittinen et al. focused on a small(er) company using another ERP system than SAP. Their case study was constructed in
5 a manufacturing company in the aluminium industry in Finland with 1,400 employees and a turnover of 130 million euros.
The main finding of their study related to management control was that strategic control was represented by the more narrow financial control in the form of relatively simple balance sheet and P&L-reports. Operational or task control in this case company proved to be very challenging: the process of data entry caused problems because it was time consuming, inflexible and contained a lot of errors. They concluded that the major roles for management control were to keep the technological and human parts of the system somehow operational and to produce the financial accounting information. The authors end up with the question if their findings are solely applicable to their case company, or that it might have broader implications and therefore become more generally applicable.
This case study is intended to elaborate on the research conclusions that Teittinen et al. have left open in their discussion. In general, this research tries to contribute to the scarcity that is mentioned by main authors (Granlund, 2011; Teittinen et al, 2012) in the research field regarding the management control implications related to ERP systems in use and the call for making a conceptual distinction between ERP system implementation and ERP system usage. More specific, based on Teittinen’s research, it follows the design of the case study with respect to an SME company using another ERP system than SAP and is based on qualitative data collection from viewpoints of people at different levels and in different functions within the organization. In addition, besides making a scientific contribution, this thesis might be of practical interest to those working with ERP in systems in management control context.
Now that the purpose and significance of the research have been discussed, the research question can be formulated. This question is a guideline for the research in this thesis and will, with support from sub questions presented in the theory, be answered in the concluding chapter.
2. Literature
In this chapter the research in the field on the relationship between ERP and management control will be discussed. The chapter begins with a conceptualization of the definitions of management control and ERP. Thereafter, the research in the field is being translated into its current status. Research questions are highlighted in the text. In addition, there seems not to be a clear conceptual distinction between management accounting and management control in the research field. There are studies which are said to investigate the relationship between ERP and management control, but some of them use these concepts interchangeably. An example of this is the use of ‘management accounting and control’ (Granlund, 2011) which makes it unclear to what one refers. As this study is intended to contribute to research in the field, a conceptual distinction is made between management accounting and management control.
Research question:
6 2.1 Management accounting
A distinction is made in accounting for reporting and accounting for decision making and
control. The first one can be referred to as financial accounting, the latter as management
accounting. Accounting for reporting (financial accounting) is concerned with providing information to shareholders, creditors and others who are outside the organization and is about the judgment of the organization’s past performance.
Management accounting involves the collection, processing, analyzing and reporting of internal financial data and other information necessary for the management of an organization in order to make responsible decisions and to manage and control the processes in the organization. Examples of management accounting are costs, costing and break-even analysis. Management accounting is manager oriented and provides the essential data with which organizations are actually run.
Management accounting is very important for the management control of a company (Seal et al, 2006).
2.2 Management control
A management control (MCS) system is a system used by the management of an organization; it covers all resources and activities by means of which managers try to ensure that the organization successfully adapts to changes in its environment (Emmanuel et al., 1991). Management control encompasses the resources and activities that attempt to contribute to the continuity of the organization (thesis, Ter Bogt).
When defining management control one cannot ignore Anthony’s (1965) classical definition. Anthony makes a formal distinction between strategic management control and operational management control. Strategic control is about setting the goals and vision of an organization – ensuring the long-term vision. Operational control is about setting up tasks and procedures, more or less based on the short term. Anthony defines management control as the connection between strategic and operational control – it’s task being to support monitoring the short-term performance on the one hand while keeping an eye on the long-term strategic goals.
Since the 80’s the definition of management control systems has developed from mainly formal and financial information for management to information in a much broader context (Chenhall, 2003). Today a management control system contains also (decision-)information for management with regards to markets, customers, competitors, non-financial information related to production, predictions and a wide range of support mechanisms in the field of human and social control. An important element of management control systems lies in the control of people in organizations. People have different goals and motives to work for an organization. The more these goals and motives - and thus the behavior of employees - are in line with those of the organization, the less the organization depends on the management control system to ‘control’ its employees.
7 perform. Action control, unlike result control, is a form of direct management control that compels employees to conform to the organization. Examples include setting authority to sign up to a certain amount or separation of duties. Personnel control is a form of management control that assumes that employees control and motivate themselves. The organization must create an environment in which this is possible. Cultural control is a form of management control in which employees ‘self-correct’ other employees, who disregard the goals and motivations of the organization.
Another distinction in management control comes from academic literature (Ouchi, 1979; Van der Meer-Kooistra and Vosselman, 2000; Vosselman and Van der Meer-Kooistra, 2006) which identifies three mechanisms. The market mechanism assumes that employees put their own goals and motives first and use these as effectively as possible for the organization for which they work. The clan mechanism assumes that an organization selects and trains its employees in such a way that the goals and motivation of employees are unanimous to that of the organization. The
bureaucracy mechanism occupies a middle position: on the one hand the organization keeps
monitoring the output of its employees; on the other hand it tries to conform the goals and motivations of its employees to those of the organization.
As shown, management control systems have been defined in various ways in the research field. This case study follows the view of Teittinen et al. (2012), who explored the use and implications of ERP technology for management control mainly in the light of Anthony (1965) and Merchant and Van der Stede (2012). According to Teittinen et al. these authors analytically distinguish management control from strategic control and operational control.
2.3 ERP systems
ERP systems have also been defined in various ways. In order to understand their meaning, some conceptual definitions are provided from the literature,. An early definition comes from Davenport (1998), who states that ERP systems are software packages that seamlessly integrate all of the information flowing through an enterprise. The basic idea is that a single central database draws data from - and feeds data into - several applications supporting various organizational functions as management of inventory, production, sales, purchasing and finance. Seen in this light, ERP systems are modular, enabling enterprises to adopt only the necessary parts of the software (Lepistö, 2014). Davenport’s definition does not differ very much from the one stated by Dechow and Mouritsen (2005). They conceptualize ERPs as organization-wide and integrated information systems that can be used to manage and coordinate all the resources, information and functions of a business from shared data stores. As ERPs are intended to integrate all corporate information into one central database, they allow all information to be retrieved from many different organizational positions and to make any organization visible. 2.4 Management control and ERP
8 been written about management accounting and/or management control practices in AIS research. In a later research note (Granlund, 2011) one can read again that AIS research has still largely ignored the production of information for management accounting and/or management control. The AIS research field is mainly focusing on technical aspects of accounting systems and seems to be less interested in management topics. On the other hand, if we take a look at the accounting side in analyzing the relationship between management control and ERP, some more research findings are available (Granlund & Malmi, 2002; Dechow & Mouritsen, 2005; Scapens & Jazayeri, 2003; Quattrone & Hopper, 2005) with a more managerial point of view. However, in general, the research level regarding ERP and management control is limited. This may sound remarkable, as much research is done on other themes (i.e. culture and organizational structure) that influence management control. One might think of the various studies regarding the cultural dimensions from Hofstede, which are widely reported in management accounting research. As Hyvönen (2006) states, IT is among the most important carriers of accounting systems and information. This is also mentioned by Granlund (2007) in his paper. His interviewees state ERP as the most important single driver of recent developments in management accounting and/or management control. In his papers Granlund (2007, 2011), who is one of the leading authors in the research field, divides these researches into subcategories, namely “visible” effects and “invisible” effects.
2.3.1 Visible effects
9 2.3.2 Invisible effects
If we take a look at the invisible effects, we learn more about the ways in which people use ERP in their everyday practice and how this affects formal and informal forms of management control (Granlund, 2011). An interesting point in this context comes from Dechow & Mouritsen (2005): they question how ERP technology works in everyday practice and whether people are using additional (control) systems besides ERP. This research is what Granlund (2007) refers to as “Actor-Network Theory”. These studies are classified this way because they aim to go deeper into the research interface between ERP and management control, and try to analyze in a complete way (mostly via case studies) the effects of ERP on management control. Scapens & Jazayeri (2003) for example concluded in their case study that the implementation of an ERP system, in this case SAP, has led to substantially improved and standardized information and centralization of this information flow to top management level. However, also mentioned in their study was that senior managers still tend not to use the ERP system as their only source of information – still there was a lot of usage of spreadsheets besides the ERP system to organize and report management information. The same discussion can be read in the research done by Dechow and Mouritsen (2005) and Quattrone and Hopper (2001). Dechow and Mouritsen conducted a case study in two companies – before implementing the ERP system, they found 31 local subsystems for management control purposes in the organization. With the ERP system in place, this number was strongly reduced, but there still was usage of local spreadsheets for management control purposes. Quattrone and Hopper confirm this method of working in their study – they conclude that leads and lags in the ERP system still left spaces for local discretion. So, in spite of the fact that so much data are centralized in one database, local systems are still used, even though (parent) companies may have attempted not to use them. Local systems or spreadsheet models are used commonly for management control purposes. According to Chapman and Chua (2003) ERPs are expected to crowd out or at least limit the scope and applicability of local and informal control systems. This is in accordance with the general tendency of organizations to standardize IT and control systems. However, this globalization and standardization may pose a threat to the quality of local decision support (Scapens and Jazayeri, 2003). In cases in which the specific local information needs are not fully met by the global ERPs, additional software and spreadsheet models will be needed.
The need for local systems may emerge from the fact that in many large (often globally operating) companies using ERPs, the control of reporting processes and the report menu is centralized to the parent companies. Reports are often changed or added via this parent company, which is not easy to accomplish. In practice, what happens here is that reports are created by people themselves. This is one more indication of how local needs may suffer at the expense of a globally coordinated information system that is thought to be efficient in many respects.
10 In the editorial paper by Granlund, Mouritsen & Vaassen (2013) we read more or less the same research conclusions as we did 10 years earlier. The authors point out that there are only a few generally accepted conclusions about the relationships between ERP and management control, and in general our knowledge about it can be qualified as poor. However, as the authors continue their story, one might ask how ERP may have direct relations that could be assumed. They state, as an example, that the implementation of an ERP system does not automatically lead to better management control: ERP may be supporting in designing better management control systems, but it is not the solution itself. Therefore, the authors argue, how IT circumscribes management control and how management control mediates IT are still a set of good research questions. Multiple and different variables and consequences can be applicable in understanding the relationship between IT and management control. In general we need to extend our knowledge by moving away from simple frameworks to more balanced views of relations between IT and management control (Granlund, Mouritsen & Vaassen, 2013).
The authors invoke the research of Teittinen et al. (2012) who theorize the relations between ERP and management control under various circumstances. Their study aims at exploring and theorizing the benefits, challenges and problems for management control regarding an ERP system in the usage phase instead of the implementation phase. These researchers thereby referred to the work of Dechow and Mouritsen (2005). ERP is said to integrate all processes into a business system (standardization) and to enable centralized management (control). In theory, ERP inhabits a lot of formal procedures for controlling a company. However, as ERP is a standard solution, the question arises how people make everyday use of these systems.
Teittinen et al. (2012) focused on the basic management control principles as described in this theory chapter: strategic, management and operational (task) control. They conceptualized management control mainly in the light of Anthony (1965) and Merchant and Van der Stede (2012), as these authors make an analytical distinction between management control and strategic and task control. According to Teittinen et al. (2012) one can read that research based on different organizational levels may have different perspectives on ERP systems. Furthermore, they argued that research should not only focus on big multinational firms, but also on smaller firms acting in SME context. Besides that, in earlier studies the focus of ERP research has been mainly on interviews with top management. In their research the focus was company-wide, meaning not only data retrieving from top management, but seen in the light of the whole company.
11 Figure 1 Research model Teittinen et al. (2012) The case study in this research follows the call for research by Granlund, Mouritsen and Vaassen (2013) to move away from simple frameworks to more balanced views of relations between ERP and management control. It is based on the research done by Teittinen et al. (2012). The focus will be on a firm in SME context instead of a big multinational company and on another ERP system than SAP. The used ERP system in this case study is Exact Globe Next, a leading global supplier of complete ERP solutions for small and medium-sized enterprises. As this ERP system is mainly used by SME companies, we follow the argument that research findings should also be based on results from smaller companies.
With regard to the literature review, and in support of answering the research question as presented in the introduction, the following sub questions are presented:
3. Methodology
In this chapter the research methodology is presented. In paragraph 3.1 the case organization is described; it includes a table with the main characteristics between the research of Teittinen et al. (2012) and this research. In paragraph 3.2 the research method and data collection are described: this paragraph includes a table of the people who were interviewed.
3.1 Case organization
The case organization, ChemCom Industries B.V. (further: CCI) was established in 2012 after a management buy-out from its parent company. CCI produces resins for the green wood industry and intermediates for the chemical industry. The current product range of CCI consists of formaldehyde and formaldehyde-based resins, urea and methanol solutions. Within their existing
Sub questions:
- Is an ERP system leading to better management control?
12 product portfolio CCI offers adhesive solutions for the green wood industry, in particular construction, building as well as interior and furniture industry. Formaldehyde is a building block in the chemical industry and is sold to chemical companies and chemical traders. Both are traditional bulk markets. The resins market erodes due to a shift from West to Eastern Europe (lower wages) and decrease in demand. In principle it is possible to deliver those products to locations in Eastern Europe, but then the company’s profit margins will vanish by transporting costs. The resins market is highly cyclical and has declined sharply due to the economic crisis. In the long term, CCI has no right to exist if they keep in business only in the current markets. A new product portfolio with innovative, green solutions and products is essential for the continuity of CCI’s business and employment. During 2015 CCI installed a completely new factory unit producing high end fertilizers in granular form – one of the first steps in changing the product portfolio. At the moment, CCI has an annual turnover of €60.000.000. It is a highly automated company with approximately 40 employees, which operates 24 hours a day.
The method of working within the company is characterized largely by efficiency and effectiveness. All processes, whether manufacturing, administration or other business processes, are organized according to the Lean Manufacturing and First Time Right method. The way management and employees operate their business is strongly based on their processes and under continuous improvement. Processes that are not considered as 'core' are outsourced to partners with whom the company usually has long-standing relationships.
As part of the former parent company, CCI worked with systems that were set out by the company group. In recent years a customized Oracle solution was used. This solution resulted in many cumbersome operations and procedures. Much data were available but were not correctly transposed in reporting of adequate (management) information. The system was blocking further improvements of the processes and increase of the efficiency. After the management buy-out, the management developed a vision regarding future automation. CCI’s goal was to implement a modern, lean and easily working ERP system which should be easy to maintain. Also, the new ERP system should be an added value to the view on the digitization of workflows, documentation and archiving. A system that was ready for future contribution to the growth strategy of the company. After a period of demonstrations and testing, the ERP system of Exact Globe Next was considered to be best of the test.
Besides the fact that CCI renewed its ERP system within four months, the company also rolled out a new MES2 system and implemented a SharePoint solution for documentation purposes. In a relatively short period of time, all critical business systems, except for the process computers in the production environment, were replaced by a modern integrated solution of which Exact Globe Next is the heart. The Exact ERP system now fully supports CCI’s business and has automated many process steps or made them redundant. CCI is now lean in its automated (ERP) processes. For example, a transporting company can now fully independently load their trucks with the loading number from Exact. After loading a truck of bulk resin product, the weighbridge (which is also linked to the Exact ERP system) in combination with the linked LIMS (Laboratory Information Management System) system, supplies the transporter the Certificate of Analysis (COA), the Safety Data Sheet (SDS) and the delivery note. These actions all happen without any manual intervention from an employee of CCI. After this loading procedure, the ERP system
13 automatically generates the bonus and commission system for any loaded product; the system directly generates the appropriate accruals at the right customer / product combinations. The next day the invoice for the load can be sent to the customer automatically. There is also a link with the MES system that fully automates the production system of CCI, which ensures that production batch information is transferred automatically from the PLC process computer via the MES system to the ERP system.
The company had a very successful ERP implementation project. From the first day of ‘go-live’ all (ERP) processes worked flawless and ERP was settled as the integrated IT-heart of the company. The success of the project had not gone unnoticed by the ERP vendor, Exact Globe Next, which dubbed it ‘Project of the Year’ in their contest.
Below a table is presented with the main characteristics (similarities and differences) between the research of Teittinen et al. (2012) and this one. As the authors invite others to test whether their propositions hold under other circumstances, some other features are available with reference to country, branch, number of employees albeit also an SME company, and another ERP system.
Characteristic Teittinen et al. (2012) This research
Country Finland The Netherlands
Branch Manufacturing Chemical industry
# employees 1400 40
Annual turnover 130 Million Euros 60 Million Euros
Type of organization SME SME
Years after go-live 4 2
ERP system IBS Exact Globe Next
Exact is a leading global supplier of complete ERP solutions for small and medium-sized enterprises. Exact supports over 100,000 small to medium-sized enterprises in more than 125 countries with their daily management3. The study of Teittinen also focused on a middle-sized organization.
ERP modules installed All All
Figure 2: Table containing characteristics of the case companies
3.2 Research method and data collection
To achieve a full understanding of the situation in this company, the qualitative and explorative case study method is used, basing arguments on findings from real life (Teittinen et al. 2012, via: Ahrens and Dent, 1998; Ahrens and Chapman, 2006, Ahrens et al., 2008; Vaivio, 2008). This
14 research method is often proposed in studying the effects of ERP in organizations (Teittinen et al. 2012, via: Sutton, 2006; Rom & Rohde, 2007; Granlund, 2011).
The case study was conducted from March 2015 to November 2015 and included several interviews with people from different organizational levels: the author has spoken to top management, finance & administration people as well as several people from different organizational levels responsible for production. From top management perspective the interview data come from interviews with the general manager, the plant manager and the finance manager (who used to be controller earlier in his career). From mid-level organizational perspective, data come from interviews with the controller, the logistic employee and the system analyst. From operational perspective the interview data come from four operators. Within the case company these interviewees present a good reflection of the organization. In addition to a personnel system with teams of operators (three per team) the general management, together with the operational management, is a significant majority in the organization. The managers of the company are the end users of the decision information with the ERP system as their source. The interviewees from the mid-level perspective are positioned hierarchically between management and operators. Yet these are the employees who work the most with the ERP system. They belong to the service staff and from their roles these people are expected to have a good understanding of how the ERP system works in daily practice.
Views of people with different backgrounds and from different organizational levels are supposed to give a good perspective on the usage of the ERP system4. Teittinen et al. (2012) found contradictions between top management and operational level regarding the usage of the ERP system. Therefore, within this case study interviews are held on all organizational levels. In total, 10 interviewees (25% of the workforce) were invited to make a contribution to this research. With a sample size of 25% of the company population we are expected to get a good picture of the situation in the case company.
Additional to the internal interviewees in the case company, an interview was held with the leading consultant of the implementation partner. This person worked a couple of months, during the implementation of the ERP system and together with key-users of the ERP system, within the case company. In this implementation project he aligned the working processes of the case company with the ERP system and is expected to have a good view on the (management control) issues with the ERP system.
In Figure 3 the interview matrix is presented. The interview script that is used is presented in the appendix to this thesis5. Besides spoken material, the author had unlimited access to all the company documents and correspondence regarding the ERP system. These documents were helpful in understanding the usage of the ERP system and were supporting the information received in interviews.
The data within this case study are analyzed the same way they were analyzed in the article that was the inspiration for this case study, namely that by Teittinen et al. (2012). Data in this case study are built up by categorizing the issues and advantages that came up during the diverse
15 meetings and discussions. These categories are divided into ERP related benefits (when there is a certain form of advantage or a positive process) and ERP related challenges (when there is a certain form of disadvantage or a negative issue or a problem). In appendix 4 one can find an elaborated transcript of the interview with the Finance Manager as example of the interview process using the literal transcription system.
Function Responsibilities / goal of the function / goal of the interview
Age F/M Date
General Manager Responsible for integral leadership to the organization for the long-term development and integrated strategic management of the organization. Execution takes place within the context of laws and regulations and/or administrative general frameworks and/or objectives. Interviewed as a representative of strategic management.
52 M 31-07-2015
Finance Manager Responsible for managing the financial risks, the preparation of the financial administration and the execution of the financial policy within the organization.
Interviewed as a representative of strategic management and as a representative of controlling and later in his career finance manager. Project member and project leader of several ERP implementations.
52 M 26-08-2015
Plant Manager Managing all activities related to production, transportation and maintenance, so that business systems and employees function optimally and production and marketing goals are achieved.
Responsible for QEHS, BRZO coordination and contact with the authorities.
Interviewed as a representative of strategic management and production management.
55 M 30-07-2015
Logistic and customer service employee
Responsible for planning, steering and coordination of ongoing processes for the purpose of quality, low cost and efficiencies of the process and storage of goods. Interviewed as representative of the sales department and as a representative of production and raw material planning.
16
Controller Responsible for the planning and control process of the organization. The core of the work is collecting, organizing, analyzing and reporting of (primarily) financial information to management of the organization.
Interviewed as a representative of financial management, controlling and daily financial responsibility within ERP. Project member of several ERP implementations.
36 M 18-03-2015
Operator (in total 4 operators were interviewed)
Acting as a leader in emergencies and achieving optimal production of formaldehyde and resins by operating the plant from the control room, so that standards of efficiencies and quality are met, and conform the regulations for processes, safety and company (EHS).
Interviewed as a representative of operations and production. 44 26 38 32 M M M M 29-07-2015 25-08-2015 27-10-2015 29-10-2015 System Analyst Responsible for examination, analysis and evaluation
of IT requirements, procedures and problems of customers. Responsible for development of proposals and plans to improve existing or future information systems.
Interviewed as a representative of IT. Project member of several ERP implementations.
52 F 22-07-2015
Outside the case company:
ERP-consultant from the implementing partner
- ERP Implementation consultant for 8 years - Master degree in Operations Management
Lead consultant in ERP Implementation Project at the case company
35 M 26-10-2015
Figure 3: Interview matrix
4. Results
This chapter contains the results of the research with the collected data from the interviews. The challenges and benefits are divided into paragraphs 4.1 and 4.2. Paragraph 4.3 presents the results with the research done by Teittinen et al. (2012).
4.1 The benefits of ERP for the case company 4.1.1 User interface, standardization and integration
17 “As it is implemented this way, it is one of the best systems we have ever had. That is because of
the fact the system has one uniform interface” (System Analyst, 22-07-2015)
This uniformity of screens for multiple business processes (Sales, Purchasing, Inventory) creates a big advantage on the standardization and user-friendliness of the system. Furthermore, if screens in an ERP system have the same layout, it also creates a learning advantage. People learn faster how to work with the system. For example, if an employee can entry and control the routing of a Purchase Order, he or she can also do it for a Sales Order. These processes are comparable within an ERP system.
Another important advantage of process standardization is the digitalization of basic documents within ERP. All orders in the system, whether they are sales or purchasing related, create standard documents for order confirmations, transportation, certificates of analysis (quality) and invoicing. Within ERP, all these documents are digitally stored and linked from the beginning of the process (the entry of the order) to the end of the process (the payment of the associated invoice). This standardization and digitalization of documents create an advantage for archiving and controlling of data, because all are stored in one system.
The third big advantage presented was the integration of data and information. In Figure 4, which is a figure used in the case company, one can see that the ERP system is the IT heart of the case company. Data and/or information flow to the ERP system (i.e. from the MES system ‘Aspentech’) or the ERP system is the source of data to another system (i.e. the reporting system called ‘Sumatra’).
Figure 4 : System pyramid case company
18 moderate impact of ERP on management control. Since the beginning of research within the research field these effects were more or less to be expected and are, as described, also applicable to the case company.
4.1.2 Production and office environment
A common thread in literature and other case studies is the integration of the production environment within ERP. This integration of production data can be two fold. On the one hand it is the need to transfer the production information into the ERP system. This production information contains data as production quantity, quality, inventory of raw materials, intermediary and end products which have to be processed to the Sales, Purchasing, Quality or Finance department of the organization or the ERP system. On the other hand, one might think of an integrated production planning system in ERP, where the information of production planning and production results have to communicate with one another. In this case one can speak of an MRP6 planning in ERP. MRP is an integrated production control system with the goal to create forecasts of products to be manufactured, based on available people, machines and inventories. Both processes can be a stumbling block in the transfer of data from production environment to the more administrative environment which ERP actually is. Within the case company a clear distinction is made between this production environment (MRP) and the office environment (ERP).
“Conscious choice. We have two worlds because we are a chemical company and work 24 hours a day and 7 days a week. Our factories are producing continuously and there are always some
operators.” (Finance Manager, 26-08-2015)
Within the case company the production control and maintenance of our factories, and also the maintenance on production process computers, is focused on 24/7 service and production. If there is a system failure, an IT supplier has to respond within half an hour to investigate the failure, either remote or on location. Failures in IT in the production environment have to be solved as soon as possible, because production has to go on continuously.
“Office automation, on the other hand, is a daytime event which occurs on Monday till Friday between 9 and 5. The support on office IT is also arranged on daytime basis. If you have integrated your production environment in ERP or your MRP planning giving production orders to ERP, and a failure occurs, then an operator does not know what to produce. It can even be that bad that connections are lost with the process computers of the factory, or that batches cannot be closed and an operator cannot start the next production batch. Within our company the solution is
the MES system.” (Finance Manager, 26-08-2015)
To avoid failures between production and office environment in the case company, the MES system is installed. The MES-system is an information system which monitors and drives production processes with a continuous character (i.e. oil production and –processing, metal, chemical and/or food industries). A MES-system is a real-time system as well as a data archive for historical production data. The system provides a control function for the whole production process including planning and controlling of production orders, batch processing and material
19 accounting. These production processes and information are derived from PLCs (factory computers). The MES system connects the factory systems (PLC) with the ERP system.
The case company is quite clear in its structure because there are relatively little means of production: two factories in a continuous process, two factories in batch processes, around fifty end products and around fifty customers. So, in this case, the MES system fits well in the company’s processes. All production data are processed directly and automatically from the factory computers to the ERP system. It prevents manual data entry from production to the administration environment and it prevents the need for production people (operators) to work in the ERP environment. It reduces the pressure of data entry in ERP from the (operational) people for whom it is least obvious to do. These people continue to work in their (automated) production system, where the MES system processes the production information to the ERP system.
Despite the fact that the case company uses an ERP system and one might expect that the ERP system centralized all the company information in this database, another local subsystem was needed to have more operational (production) control in the company. This has been discussed in earlier research (Dechow and Mouritsen, 2005; Quattrone and Hopper, 2001). However, these discussions were more about ‘smaller’ local subsystems and/or spreadsheets which were supporting management control purposes. Within the case company, the local subsystem that supports the ERP system is the MES-system. It is a building block beside the ERP system which separates, but also connects, the production processes and relevant data from the administrative ones and thereby creates strong operational control.
4.2 The challenges of ERP for the case company 4.2.1 Management reporting
“For all basic reporting it should be possible to report without the use of Excel” (Finance Manager, 26-08-2015)
For the case company reporting without Excel is not possible at the moment. The monthly management reporting is not available in a standard reporting format. Despite the fact that all kinds of standard information are available in the ERP system with the structure of Exact for financial information and MES for production information, there is no solution to retrieve this information automatically in the desired reporting format for management.
“The case company’s reporting is more a data dump than a management report.” (General Manager, 31-07-2015)
20 information is presented straight out of the ERP to a management (control) tool without the use of spreadsheets and the risk of manual entry errors.
For reporting purposes we can conclude that the case company is, at the moment, not able to manage this process without the help of a local subsystem in the form of spreadsheets (Dechow and Mouritsen, 2005; Quattrone and Hopper, 2001).
“The basis is: create standard reporting. In my experience there are few systems which supply good standard reporting.” (Finance Manager, 26-08-2015)
“ERP can deliver data, but that is not yet information. ERP is a means to create (management) information.” (ERP consultant, 26-10-2015)
“Within the case company the operational control is adequate, the basis processes in the ERP system are working well. The data model is set up well and there are good data control checks –
this means that the data itself are well embedded in the systems. However, the next step is to retrieve information, for management control purposes, out of the data model. That information
should follow in the form of linked management dashboards.” (Finance Manager, 26-08-2015) If we take a glance at the routing of ERP implementation within the case study, and according to the Finance Manager and the ERP consultant this is also generally applicable, a distribution in 3 phases can be set up. Phase 1 is always a very challenging phase: it is the device and/or implementation of the system, which is done adequately within the case company. After that, we move on to the learning phase: the system is new and people have to build up experience with using the system. This is a phase of continuous improvement. And if you move on to the next phase, when you know how to work with the system, you are going to implement reporting methods. You have to see the phases as building blocks and part of your (extended) ERP implementation project.
“You need to tune your information needs with the information you really need.” (Finance Manager, 26-08-2015)
For management reporting purposes the case company still makes use of spreadsheets. Also, from operational control perspective and daily operations there is still a need for the use of spreadsheets. The production planning is an example of that. Spreadsheets are used, instead of the ERP system, to translate the Sales Orders into Production Orders. Due to the difficulty in parameters for inventory, production and planning, and a combination of an end product which is also used as a semi-finished product, the management of the company does not have the intention to implement the planning module into the ERP system. However, an improvement for the case company would be to install an automatic connection between planning and production to retrieve sales and inventory information in a pre-defined (spreadsheet) system. This step would prevent manual data entry from one system to another and would therefore create more data accuracy between MES and ERP regarding production (batch) control.
21 system, as the factories are connected to this system. One might think of production parameters as factory output volume, production of speed, consumption of raw materials. In the past, when the company was part of a larger group of companies, more production management information used to be monitored through so-called OPEX7-reporting. In current business, as discussed by the plant manager and the general manager, KPI’s8 regarding production, inventory and safety management are not reported and managed adequate.
“From my perspective, I would like to know more about the status of my production assets in ERP, and to have the connection between maintenance and production” (Plant Manager,
30-07-2015)
An important feature that is missing in the ERP system, and that is the case for almost any ERP system, is the availability of a CMMS9 module or system within or integrated with ERP. The goal of a CMMS module or system is to support maintenance people to do their work more efficiently and effectively in determining which machines require maintenance and what spare parts for that machine are available or needed. It should also help the management of a company to make better decisions in maintenance management, i.e. replace a machine versus more preventive maintenance versus more corrective maintenance. Better maintenance management might influence production control, i.e. it can lead to more availability of the producing machines and/or can have effect of on the strategic management of the company. It is in this light that maintenance of the machines and installations is an integrated part of the company itself, but in most ERP systems this is not integrated.
Furthermore, the ERP system at the case company does not contain a LIMS10 module. This separate system, outside ERP, is used for analytical and laboratory information regarding the characteristics and quality of the products. A data connection is available for exchanging information between both systems, but the quality control in production is not supported in ERP itself.
“Next to the ERP system, additional systems are needed for process controlling purposes. The ERP system itself is not able to control all processes in our company. We need additional systems
as ALIS/LIMS (quality control), SharePoint (document control), API Pro (maintenance control), hourly registration system (personnel control) and MES. However, these are integrated with
ERP.” (System Analyst, 22-07-2015)
The case company is forced to add separate stand-alone systems for maintenance management and quality management, as is visual presented in Figure 4. Earlier research has shown that a standardized and centralized ERP system does not lead to the abundance of sub-systems. (Quattrone and Hopper, 2001; Dechow and Mouritsen, 2005).
7 OPEX : Operational Expenditure 8 KPI : Key Performance Indicator
22 4.3 Relation to the research of Teittinen et al. (2012)
From the case study of Teittinen et al. (2012) we may conclude that most of the experienced benefits arise from top management level. At this level we can read that the ERP system is supporting and carrying out the strategic vision of the case company. In more detail, benefits that are mentioned in the research have to do with transparency of information in the ERP system and the fact that one main control system was in use. Furthermore, systematization and standardization of functions and work methods, especially between different plants, are named as big benefits of the ERP system.
On mid-level functions and from the viewpoint of office staff the main benefits of the ERP system can be seen in the everyday routine tasks. An example of this is that the gathering of monthly financial statements could be done more easily and faster. From operational level no benefits were presented in the case study of Teittinen et al. (2012).
If we compare the benefits of ERP mentioned by Teittinen et al. (2012) with those in this case study, we can conclude corresponding benefits of ERP on strategic management level regarding standardization and systematization of processes (centralized control). Besides, within the case company, an enormous step is taken in the digitization of transactional documentation (invoices, transport documents, quality documents). Also, on middle management level and/or office staff benefits do correspond with regard to time reduction in the processing of everyday routine tasks. The main difference is the separation of the production environment from the office environment, where the MES system is working in cooperation with the ERP system. All production data are collected in the MES system, where only the necessary information is transferred to the ERP system. This strategic decision of separation of both environments can be seen as a benefit for all organizational levels. Production data arise in the operational environment – it is this environment where, in general terms, people are working who don’t want to use ERP, do not understand what ERP is, do not know how to use ERP and/or are employees that make errors in making entries. Because of the separation operational people do not have to work with the ERP system, but only with their own systems (PLC11 and MES) and can therefore focus on what they are good at. Production data are transferred automatically from the basic systems to the ERP system. People working on middle management and office staff do not have to worry about retrieving operational data, and can focus on working with it instead of collecting it. It is this separation that is the biggest difference between both case companies, and also has the biggest effect on the working of the ERP system and on the relationship with management control. From the case study of Teittinen et al. (2012) we conclude that challenges arise more at operational level than at strategic level. Production management and their operational staff saw very little benefits in using the ERP system. The main challenge mentioned using the ERP system had to do with making entries. These data entry problems could be divided in:
- Understanding the process of entries itself. Operational people did not understand why
they had to entry the production data into the system and what the relation is with the whole ERP process.
23
- The process of data entry itself was considered time consuming and error sensitive; - Correcting incorrect entries was considered even more time consuming and difficult; - Operational people did not see data entry as part of their job.
Within the case study of Teittinen there was no match between the existing production process and the new ERP processes to be taken in production. Production processes had not been changed for years and now every change in production itself had to be recorded in ERP. According to management these steps, in production as well as in ERP, should be aligned in every production step, but in practice this was not a workable solution. Production in the factories was based on Sales Orders, not on the ERP system. Another issue that was mentioned in Teittinen’s case study was understaffing. Of course, in this case that works together with the problems arisen in data entry.
5. Discussion and conclusion
Paragraph 5.1 is summarizing and discussing the results of the research. The main research question is answered. Paragraph 5.2 addresses the research limitations and directions for future research.
5.1 Discussion
This case study research follows the call for more research (Granlund, Mouritsen & Vaassen, 2013) and is based on the research done by Teittinen et al. (2012). In their concluding paragraph they proposed for more research to test whether their propositions hold out and could have wider implications. This gave rise to this case study using an Exact Globe Next ERP system in SME context. Interviews were held with internal employees of the case company and with the ERP consultant of the implementation partner. The main difference between the case companies is that in the research of Teittinen et al. (2012) the data entry process was a manual, time-consuming and error-sensitive process. In this case study, however, the entry process of (production) data is automatized.
As we presented in Chapter 4, we divided the research results of the effects of ERP on management control into benefits and challenges. The benefited effects were standardization of business processes, integration of data and information, and uniformity of interfaces. Above all, the presence of the MES system leads to a big advantage in the separation of production and office environment. The challenging effects were the need of local subsystems working next to the ERP system. Examples are the CMMS system and the LIMS system.
24 Within the case company, at strategic management control level the ERP system meets the expectations and goals of the company’s management. The management strives, along with the employees, to operate their business strongly oriented towards their processes. Processes that are not considered as ‘core’ are outsourced to partners – this leads to a company that is characterized largely by efficiency and effectiveness. Furthermore, according to the management, the ERP system should be an added value to their vision around the digitization of workflows, documentation and archiving. The ERP system carries out the strategic vision of the company. It is one system that is suitable for different business lines at the moment and for future applications it is suitable for multiple partnerships and/or companies. Standardization of processes, from data entry at the ‘beginning’ of the ERP system until reporting at the ‘end’ of the system, is one of the characteristics of the company. The processes and working methods are highly formalized and all end information is centralized in the ERP system, albeit with the help of subsystems. Besides, all relevant documents are digitally available in the ERP system.
Also, operational control is well embedded in the company’s ERP system, albeit with the assistance of the MES system. All of the data regarding production activities are automatically transferred from the process computers to the MES system. In the current business lines this has been tuned for the batch production line (resins) and the continuous production line (formaldehyde). Within the continuous batch processing production data are transferred to the ERP system every 8 hours. A key point here is that only necessary information is transferred to the ERP system. These are data that are applicable to transactional recording in ERP regarding production data: quantity of production, inventory of raw material/intermediary products/end products, quality of production, date of production, product numbers. Production people (operators), therefore, do not have to deal with (manual) entries into the MES or ERP system. These people can focus on what they are good at: operating the processes for producing products. The ERP system, therefore, is supporting control on strategic as well as operational level. On strategic level by carrying out the vision of the company and on organizational level by an automated, standardized, centralized and formalized way of working. It is the role of management control to stabilize and continue the current situation, but also to develop management control in accordance with the company’s current and future requirements. We have seen that management control is fairly well organized in the case company. As we have read in chapter 3 the case company is operating in a very competitive market. One of the main objectives of CCI is to strive to cost price leadership. This is reflected in the very efficient business processes, but also their need to measure the company’s performance. Result control, mostly based on budgets, is the main management control system that is used by the company. Monthly reporting is mostly trying to reflect actual numbers versus budgets regarding sales, purchasing, projects and the profit and loss statement.
25 management information available. This missing management information is not only applicable to financial information, but also to more operational information. One might think of HSE information, quality information about products, inventory information, returns of the factory etc. In the end, when trying to fit this case study into a model as Teittinen has presented, we still see that big components for management control to control are people and technology. Therefore, we might conclude that the model presented earlier is quite a good model and maybe generally applicable. However, as there may exist different circumstances in the ERP system for every company, there may be small shifts in the model. In the case company using a MES-system, challenges for people (data entry in ERP) are shifted from the ‘people’ block to the ‘technology’ block.
Figure 6 : Concluding model
It is the role of management control to create a balance between the two big components for ERP, people and technology, in order to work together and create adequate (management) control on several levels. People have to work with the available technology – during the implementation process the right choices have to be made to have people work successfully with ERP. On the other hand, technology should help people in order to better fulfill their tasks. Once technology is becoming a big challenge in people’s everyday work, the process is not working well enough. In that case there is no balance and adjustments have to be made, either on the side of people or that of technology, to create balance and have both components working together.
In the research conclusion it is the moment to refer back to the main research question: Main research question:
What are the effects of an enterprise resource planning system on management control? Sub questions:
- Is an ERP system leading to better management control?
26 Regarding the general benefits that came up during this case study research, we might conclude that on headlines these do not differ from the general trend in the research field. These are reported as the moderate effects of ERP on management control. The implementation and use of an ERP system leads to more integration of data and information streams. It is what one might expect from a system that processes all transactions in a company. ERP is a formal, centralized system that forces the company to work along the processes as stated in the ERP system. It is in this sense, that coming back to the so called ‘visible effects’ there is hardly any difference experienced in these effects, from which we may conclude that these are generally applicable and we have, so far, no reason not to follow the existing theories. In the literature, a distinction is made between so-called ‘visible’ and ‘invisible’ effects. ‘Invisible’ in this sense means the way in which people use informal systems, besides the formal ERP system, for management control purposes.
However, as main authors in the research field (Granlund, Mouritsen & Vaassen, 2013) requested to move away from simple frameworks to more balanced views, we propose to make some accents regarding the case study and regarding SME context. These can be useful in theoretical as well as in practical/managerial consideration.
- The case company is operating very lean and has automated its processes as much as
possible. The company is, forced by the very competitive markets in which it operates, striving to cost price leadership. It is in that light that management control is strongly based on result control, with budgets as the main control type. Therefore, good management reporting is needed to provide the management of the company with adequate decision information. At the moment, monthly financial reports are the tools which should enable this sort of control. In the case study of Teittinen et al. (2012) the same results are found. As we are concluding both results in SME context, we might conclude that strategic management control in smaller companies is represented by relatively simple monthly financial reporting.
- In addition, regarding the management reporting issue, one might question the usage of
ERP as a reporting tool, especially in SME context but this might be applicable to bigger companies. An ERP system, if implemented and used well, will lead to integration and acceleration of data and information. However, these streams of data and information is not yet steering or management information. One has to investigate what information is needed for whom in the organization, when and how. This need for (management) information is to be arisen in the organization, and the ERP system can be supporting in presenting this management information.
- The presence of the MES-system led to a considerable reduction in pressure at operational
