Pak Eektron Limited
Pak Eektron Limited
A1. Introduction to the Case Analysis Report
PAK ELEKTRON LIMITED (PEL) is a manufacturer of transformers, switch gears and electric motors for the power industry, which decided to implement an ERP system in order to integrate all data from there 25 locations in one central system (also known as Oracle E-business Suite). Their decision for implementing an integrated system was due to their old legacy system having 100 different systems, which were isolated and it made difficult for the various departments to retrieve and communicate information effectively and efficiently. However, over the past year and a half they have been experiencing several difficulties implementing the system. Some of which included cash-flow problems and having to retrain and hire new staff with the necessary expertise to operate such a system.
A2. Key Stakeholders and their Preferences
The Chairman and the board are key stakeholders because if the system succeeds or fails will have direct impact on company financial results, which impacts compensation/career. Salman Rehmatallah, CIO and Atif Ameen, ERP manager (recently quit due to cash constraints) are in charge of implementing the new ERP system and thus their preferences would include the ability to obtain resources and hire staff with the appropriate skill set to run ERP. Manzar Hassan, CFO, Syed Gilani, General Manager of Finance, Iftikhar Ahmed, Financial Controller being in charge of financial reporting to the public with tight deadlines and no option for error and preparing statements to the bank has an extremely vested interest in ensuring the ERP system is implemented quickly and the results from this new system can be relied on to provide timely and accurate information for reporting purposes.
The Bank would want to ensure the company remains profitable and cash flow positive in order to protect their interests. A prompt and successful implementation will benefit the bank by reducing inventory investments, better receivables management, and reduced manufacturing costs through better controls. Also the implementation will greatly impact the ability of PEL to conserve cash, as several modules will provide analyses on PEL’s cash flow position.
A3. Constraints and risk for the new ERP system implementation at PEL A well-defined project plan driven by dates and milestones is vital in order to avoid the risk of “mission creep” and that people will not deliver on time. As R. Michael Donovan highlights in his paper, the five reasons for poor implementation of ERP systems are: failure of the operating strategy, implementation delays, poor pre-implementation activities (if at all), people not accepting to operate the new system and cost of implementation is much higher than anticipated. (Donovan 1999) Since these factors are similar to many of the problems faced by PEL it is evident that their implementation was not successful. The first risk is that no project budget appears to exist from which IT would know how much they could spend in hiring employees with technical expertise relating to ERP implementation and also how much to spend on training, software, and hardware and the period in which they were allowed to spend on these items.
The lack of cash to fund the project led to PEL being unable to hire staff with adequate expertise, as they require larger compensation packages. This also delayed Phase II, removal of AFF, creation of an MMS bridge (ex. risk of data being error prone). When operating the legacy and ERP systems simultaneously it is necessary that reconciliation procedures be performed daily and that any errors noted should be resolved immediately. If this is not followed through scrupulously there is a risk that staff will begin mistrusting the ERP system and resort to developing personal systems on their own desktops. An important feature of oracle is supply chain management and as this module has not been implemented the company is at a risk of facing high competition and incurring higher costs of future implementation plans. The next constraint is that the MRCS system cannot be switched over to the Oracle EBS Discrete Manufacturing application due to regulatory restrictions and therefore can only be performed at the end of the fiscal year Dec 31, 2011.
If no parallel system similar to MRCS or the MMS bridge can transfer data into the ERP system in order to run the manufacturing applications, then there is a risk that after the year end once the transition to the Oracle EBS manufacturing is permitted as per regulation, the system may not run properly or be error prone. Another constraint placed on PEL is due to their decision to continue the implementation in-house after having let go of A. F. Ferguson consultants because of cash flow restrictions, which now passes on the risk and burden to PEL to provide adequate training. Since the implementation is being done piecemeal over an extended period of time with only the easiest modules being implemented to date, and the opportunity to assess whether this project was successful can only be done once all modules have been implemented. This imposes a risk since at the end, if it is determined that Oracle is not the right solution for the company, PEL will have invested years of effort and resources and will be unable to recover such invests.
A4. Criteria that should be considered to ensure the successful implementation of the ERP system at PEL
As Umble et al. state in their paper, critical factors for successful implementation should include: clear understanding of strategic goals, commitment by top management, a great implementation team, extensive education and training and focused performance measures. (Umble 2003) A clear understanding of strategic goals includes having a structured plan, which has a definitive goal oriented timeline with proper workflow division. Strong will and commitment to ensure smooth running of the new system by management, will have positive impacts. Staff tends to follow by example and hence it is the top or senior level management’s responsibility to embrace the system and demonstrate ease of its usage. Furthermore, frequent and timely feedback is necessary to ensure corrective action is taken without delaying the project. The process of managing change in culture is vital to a successful implementation, as many departments will need to now develop new relationships and work more collaboratively. This is in contrast to the silo based organizational structure fostered by the legacy system.
An additional criterion for success would be to bring together a qualified implementation team, which would involve hiring those with the right technical expertise or by providing adequate training to company employees. Another criterion is to avoid customization of the new ERP system and thus reducing the amount of training required for each customized application. The system if customized could create some serious software glitches, as it may have not been designed to handle such forms of customization. Second, customization will inhibit the company’s ability to implement new releases because all the customization will have to be then redone on the new system, which will be costly and could be very damaging as the company is struggling with cash flow constraints. In order to be successfully implemented both systems should run in parallel for a period of time and rigorous process of constant reconciliation of data between the new systems must be followed, while ensuring data is maintained in real-time. Reconciling is necessary because the discrepancies could arise from the new system rules and logic having been set up to incorrectly process data or could be that the new system has caught errors that have long been allowed to go unnoticed in the old system.
For example, the legacy system charged actual overhead to inventory transactions and the new EBS is based on material overhead application concepts. Implementation should be done in phases but the most complex ones with the highest economic return should be tackled first therefore reducing overall risk to the project will be minimized because the remaining projects are simpler to install and will not impose a problem to the completion of the problem No implementation can be managed without having critical metrics and key performance indicators; key dates and other criteria that were established in the original plan being measured against actual performance for timeliness, quality, and cost. PEL can implement efficiency metrics and effective metrics.
The efficiency metrics can be used to measure the performance of EBS, for example transactions paid in system availability. Effectiveness metrics would measure the impact from EBS on business process activities, including cost/benefit analysis and ROI analysis. Therefore using metrics and benchmarking will help identify steps and procedures to improve system performance. Setting up a mission and key goals and objectives while remaining on target is an important criterion for a successful implementation. As R Michael Donovan said: “A good methodology covers all bases, but when the unexpected pops up, as it usually does, you will be prepared to handle these exceptions without severe negative consequences.” (Donovan 1999)
A5. Issues related to the implementation of system at PEL
This project became finance centric and all initial effort of the team including consultants was to ensure that the general ledger would be updated. This led to resources being focused on supporting finance including the building of bridges from legacy systems to ERP. Prioritizing the general ledger and financial modules in the implementation strategy created an enormous risk for the company as it was forced to implement the other modules over a long period of time. This may or may not result in success. Another critical issue relating to the implementation of the ERP system is cash constraints presumably arising from a sharp drop in revenues and profitability in both divisions (Appendix: Exhibit 1), which also caused PEL to get rid of AFF. Since the change in top management focus towards other serious business issues, such as internal operating costs, their attention was diverted from the ERP system implementation.
This resulted in departments working by themselves without focusing on collaboration. The progress of the project was not measured by any metric/benchmarks, which caused an encumbrance on the implementation. Since there appears to have been no project budget created in order for the IT department to know how much they could spend in hiring employees with technical expertise relating to ERP, implementation was compromised by ongoing cash flow difficulties thereby removing their authority to spend on training, software, and hardware. Given PEL is operating the legacy and ERP systems simultaneously reconciliation procedures were not performed daily and thus errors not being resolved immediately. Staff (as reported by Ahmed) began mistrusting the ERP system and resorted to developing personal systems on their desktops. This could also have serious financial regulatory and operating impacts on the company as the CFO is charged with preparing and relying on financial data provided by the ERP system, which might be error prone if not reconciled daily. Unexpected changes in business operations had an impact on the system configurations and added more complexity to the project.
This required the project to slow down in order for the team to handle these additional complexities and thereby delaying the entire project. For manufacturing companies having real-time inventory data is the lifeblood of efficient existence, which impacts all areas from scheduling manufacturing to accepting customer orders. Since PEL is late in its implementation of the manufacturing modules, its interim fix of using an MMS bridge is inappropriate, as data is uploaded into the system in batches and not in real-time and thus will continue to lead to under performance. PEL has sales offices in 25 locations across the country using a VPN, which was used to transfer data and data files. All locations needed to be linked under a wide area network (WAN), using a DSL topology in order to be able to update the central database.
Therefore a lack of a WAN and the fact that branch staff was not trained to use Oracle EBS in these locations, resulted in remote locations not being able to update company cash flow in real-time. Since the transactional processing modules were delayed in implementation, the business intelligence modules could not be used and thus management was likely unable to remain in control when major and unexpected changes occurred. Given the delay for extended periods of time while PEL encountered unexpected changes (LG distribution discontinued, dealership of Carrier expired, appliance business operating structure change) it did not have the benefit of the business intelligence it hoped to have to cope with the major changes being encountered.
A6. Alternatives available to PEL to deal with their current issues The first alternative would be to examine which modules of the ERP system provide the highest and most immediate benefit (for example Oracle Cash Management, as this will help management better understand and determine their cash flow movements) and prioritize those even if it means not implementing the rest of the ERP. This approach would require a detailed review and understanding of both the database requirements and the system logic that drives the processing of the overall system. Any module that depends on another module for critical data or is in the system architecture dependent on logic embedded in another module will need to be implemented in the proper order. The logical files would need to be tailored to allow for this gap in order for the system to not be corrupted. IT staff with pre-qualified skills would need to be hired or existing IT personnel must have their training developed through use of Oracles education program. Monitoring each module would need to be in place to evaluate data and other systems output to ensure gaps and risks previously identified are not causing problems with EBS.
A second alternative would be for top management to allocate funds from other departments to the implementation of all modules of the ERP system. Although this might cause a short-term deficit in other departments, it will enable the company to eliminate cost of running redundant legacy systems and optimize operations to get cash flow benefits promptly. PEL can ensure that rehiring AFF will facilitate this top priority project and train staff with appraisals and penalties depending on performance. It is also important that a project plan be created in order for the project team to know when and how to complete the implementation process. As part of the implementation PEL needs to have all systems linked through a WAN in order to update the central database system, thereby allowing all departments to update the central database in real-time, which is necessary for implementing the remaining Phase I modules, such as Oracle cash management, which require a complete roll out to all locations.
A final alternative would be to abandon the project and continue operating under the legacy system. This alternative is the most unattractive but needs to be examined, as it will save PEL from further EBS expenditures. However note that the legacy system runs on Microsoft Visual FoxPro, which is no longer supported since the launch of their .net platform. Therefore maintaining the legacy system can become increasingly more expensive and challenging because of a likely shortage of technical personnel who would be able to help in case of system problems. It would also make PEL look backwards, as all competitors have embraced ERP.
For all alternatives above the concept of sunk costs should be given much importance as the justification of such costs may only lead to incurring more costs in suboptimal ways.
A7. Recommendation and review of the implementation plan relating to our recommendation. It is recommended that the first alternative be selected. This approach is to implement modules that provide the highest and most immediate benefit, even if it means not implementing the rest of the ERP. This approach is optimal as it focuses and identifies only modules necessary for accomplishing management’s objectives instead of allocating resources to implementing modules that may not improves business efficiency. Therefore this alternative not only will provide for an integrated system, which has data uploaded in real-time and elimination of data redundancy, it will also provide for a cash savings approach, which has now become managements top priority.
Furthermore, top management needs to provide a strong endorsement to the project and IF necessary allocate resources away from other departments to fund the ERP system in order to ensure that the entire project be completed at the earliest possible date. It should be ensured that no other priorities redirect time and attention of departmental heads away from the completion of this project. The resources required should be immediately allocated including hiring of the consultant AFF and acquisition of any hardware, training modules and other support staff. Clear deadlines, frequent follow-ups, minimal delays and constant performance feedback are important elements that have to be considered while implementing this strategy.
For the manufacturing modules PEL should implement efficiency metrics and effective metrics. The efficiency metrics are necessary for measuring the performance of EBS, for example throughput, transaction speed and system availability. The effectiveness metrics would measure the impact from EBS on business process activities, including cost/benefit/ROI analysis.
It is important that PEL employees fully align with the changes and understand how the new system will create value to them. The process of managing the change in culture is vital because many departments will need to now develop new relationships with each other and work more collaboratively with each other. For key employees who are vital to the legacy system but not to the new ERP system it may be useful to offer an incentive package, which will include not just cash to remain until a certain date but other support, such as strong reference letters and assistance with procuring other employment upon implementation of the ERP. It is evident that the Power sector relies heavily on the government/public sector for its revenue. (Appendix: Exhibit 2) On the assumption the government in turn sees PEL as an important supplier they may find it difficult to replace them in the event of its shut down.
PEL may wish to explore leveraging their standing by requesting the government/public sector provide a loan/subsidy in order to hire more technical, consultant manpower and hardware. Since PEL has been experiencing cash flow constraints it could seek a sale/leaseback arrangement through a leasing company whereby PEL sells all the hardware and software that it has already purchased and leases it back over an extended period of time. This will allow the company to complete the implementation process despite its cash flow problems and pay back the funds over a long period of time as its own cash flow improves through cash savings.
A8. The impact on PEL of changing from Microsoft (Legacy System) to Oracle (EBS ERP system)
The biggest change in implementing and ERP system versus the Legacy based silo system is the cultural impact on the overall organization. The ERP system would require the entire company to operate as one cohesive team, performing tasks in real-time and not resorting to a policy of maintaining private databases. The benefits of an integrated system and data base is the elimination of data redundancy, which leads to reduced cost of processing and personnel thereby allowing appropriate downsizing of employees and reduction in data corruption, which also improves timeliness and trust of data. The business intelligence modules will allow management to run the business to much greater degree in dashboard mode, which allows top management to view significant trends in the business immediately and allows them to take corrective action promptly.
They are also able to drill down from a high level to the detailed transactional level in order to better understand their business. Concerns management will have to address include the need to have a higher skill set and higher cost of employees due to the complexity of the systems and also be prepared to invest more in data storage because of the extraordinarily large database that the EBS system requires.
 Ahmed, Muntazar Bashir. “PAK Elektron Limited: Converting Systems to ERP.” Ivey Case- 9B12E002. 2012  Donovan, Michael. “Successful ERP Implementation the First Time.” Midrange ERP. August 1999.  Umble, Elisabeth J., Ronald R. Haft, and M. Michael Umble. “”Enterprise resource planning: Implementation procedures and critical success factors.”.” European journal of operational research 146, no. 2 (2003): 241-257.