Asian IT Case Series

Case No: Case No: ES 004 Date: September 29, 2008 Shan Ling Pan, Mahdieh Taher

Maxima Inc.: Enterprise Resource Planning Project Failure

Company Background Maxima Inc. (a pseudonym) is a Singapore-based holding company started in 1993 by the CEO, Mr Chen and six of his associates. It started off as a seven-man start-up company, and over the years, it has grown to a successful business with staff strength of 280 by 2000. Maximas primary business revolves around the distribution of electronics and the provision of solutions for IT industries. Maxima Inc. has five subsidiaries under its corporate umbrella, namely, Maxima Components, Maxima Technology, Maxima Electronics, Maxima Investment Pte. Ltd., and Maxima Networks Pte. Ltd. Each of the subsidiaries operates independently and has its own management and operational policies. The subsidiaries, however, are responsible for achieving the profit and revenue targets set by the parent company. Maxima Inc. serves as a centralized financial controller and provides guidance and advice regarding the strategic planning of each subsidiary. The company achieved S$300 million in sales revenue in 2000, and this figure has been increasing annually, with an impressive 142% increase in sales in 2001 compared to the previous year. The Need for an ERP System In 1999, the e-commerce boom was in full swing with many companies making a bid for a slice of the lucrative market. Businesses were investing in strategic information systems to ride the e-commerce wave. Many companies in Singapore and in the region were not far behind. In particular, there was an impetus to reengineer business processes and implement information systems capable of coping with the needs of e-commerce. Along with the apparent need for e-commerce presence, the need for an enterprise-wide system also increased. In particular, businesses needed to establish a backend infrastructure that could cope with the data and system needs of e-commerce activities. Enterprise Resource Planning (ERP) packages were believed by many organizations as the solution to such needs. These integrated system packages cater to the needs of many businesses by providing ready modules for various business functions, and could be customized to the specifications of each company. As recalled by the IT manager of Maxima, At that time, many in the industry were talking about the need to integrate business processes and functions in order to take advantage of the potential business benefits of ecommerce. We, too, were seriously considering an enterprise-wide system in order to help streamline our business processes and integrate our work practices better.
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Indeed, it was not long before the company recognized the importance of e-commerce for its business to prosper and continue its growth into the future. It was also felt that implementing an ERP system within its organizations would enable Maxima to better leverage the opportunities provided by ecommerce. Some of the commonly used ERP packages in the industries included JD Edwards, which was mainly used in high-tech electronics industries; the Oracle suite of systems, which were used in many industries; and Peoplesoft, mainly for human resource related functions. Others included Baan and SAP, commonly used in many of the large industries spanning many functional areas. While Maxima started its business operations in 1993, most of the paperwork was done manually through the years until 1997. Before then, the company had no integrated software system to manage its business functions and work processes. By 1997, the management recognized the need for a business information system and decided to buy ACCPAC (an accounting software) for use at its Finance department. They also bought another off-the-shelf application, called Computerized Information Management Operating System (CIMOS) to help the companys distribution and Return Material Authorization (RMA) process. Even with these two systems in place, manual work was still required, as the two systems were not integrated. In May 1999, the management decided to embark on a two-million dollar project to implement an ERP system that would cover the areas of order fulfillment, finance, RMA, e-commerce applications and business intelligence. It was agreed that the system would replace ACCPAC and CIMOS. Being a fully integrated system, the ERP system would also eliminate most of the manual paper work. The management envisioned that the ERP system would be implemented to all its subsidiaries. This would gradually establish an e-commerce infrastructure that would allow data integration across all subsidiaries, suppliers, and even customers. As the managing director recalled, We knew we needed to put in place an integrated business system to help us organize our work better. We were told, at that time, by the IT consultants that ERP was a very powerful system that could do just what we wanted. At the same time, it would also act as an infrastructure suitable for our launch of e-commerce activities. In other words, the ERP system was to be set up to establish complete upstream and downstream integration across all Maxima Inc. subsidiaries. With an ERP system, it was possible to bring many benefits to the organization. Some of the key benefits as perceived by Maxima were: Best business practices, which would provide a competitive advantage Decision support for the management to make decisions with accurate and updated information Integrated information systems for data integrity and centralized storage Inventory visibility for all sites Efficient Service/Returned Material Authorization (RMA) processes to provide better service and warranty management An integrated financial module Easier market expansion to other regions Support for e-commerce activities with suppliers and customers, saving costs Availability for business 24 ! 7 Better service to customers and suppliers with online information Streamlined business processes The management decided to implement the ERP system in three phases. In the first phase, the application was to be rolled out to Maxima Inc. and its subsidiaries in Singapore, including Maxima Technology Pte. Ltd., and Maxima Electronics Pte. Ltd. In the next phase, the remaining subsidiaries and their respective subholdings would be connected to the central server in Singapore. The third phase was to set up the e-commerce infrastructure and include inventory modules. The business-tobusiness (B2B) applications deployed during this phase would enable co-operation with its business partners. Finally, the objective was to expand business operations to the retail consumer market
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through its business-to-consumer (B2C) applications. Figure 1 is a graphical presentation of the major activities of the project.

Figure 1: Timeline for key events in ERP implementation

Pre-implementation Phase Selection of ERP Package After establishing the objectives for its ERP adoption, Maxima Inc. moved ahead with the task of package evaluation and selection. A task force with eight members was formed in January 2000 to evaluate the various ERP packages available in the market. The team included the Chief Operating Officer, the Business Managers of subsidiaries and representatives from the Management Information System (MIS) departments. The team evaluated JD Edwards, Oracle, BAAN, Damguade, Exact, Navision, and Great Plains. Out of the seven ERP packages, Oracle, Baan, JD Edwards, and Sage were selected for further evaluation. The evaluation process included presentations and demonstrations of the ERP packages by sales people and discussion of possible customization of the packages. The team also looked at the different functionalities offered by each ERP package, particularly in the modules of sales, purchase, inventory, finance, RMA, and e-commerce. Other modules included the customized workflow, human resource, and reporting modules. These functionalities were mapped against the companys requirements and processes. The evaluation process took 6 months. The evaluation team carefully considered the ERP packages and suggested the use of JD Edwards as a first choice for Maxima Inc. The representative from JD Edwards understood the industry very well, and provided good suggestions on how the existing business processes could be translated into the new ERP system. JD Edwards could also do FIFO costing, a requirement of the Finance department of the company, which Oracle could not. Apart from this, the RMA module of JD Edwards, which was a dedicated RMA tool, best suited Maxima Incs existing processes. The Graphical User Interfaces could be customized with ease and
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were user friendly. JD Edwards was also competitive in price and provided satisfactory support for its other customers in the region. Additionally, it was web-enabled. To the evaluation team, adopting JD Edwards meant getting a step closer to implementing e-commerce for Maxima Inc. As a system analyst recalled, JD Edwards was a choice deemed most suitable for us. In fact, most of the technical people in the Industry were also in agreement with our initial analysis of the package. The team prepared their formal report and recommended the adoption of JD Edwards, highlighting its merits. Oracle was presented as a second choice after careful evaluation. However, the management of Maxima Inc. decided on Oracle instead of JD Edwards. This came as a surprise to the evaluation team as they had been tasked to evaluate the various possible ERP packages and had concluded that Oracle was not the best choice for the company. It appeared to the evaluation team that the management had made a deliberate premeditated decision in purchasing Oracle and might have preempted the evaluation process. According to the top management of the company, Oracle, being a leader in ERP and e-commerce applications offered a very good discount for its licenses. Oracles reputation as an organization with offices worldwide and stories of the successful implementations of its ERP packages prompted the top management to decide that Oracle would be the preferred choice. In addition, Oracle announced an 18% increase in its revenue in March 2000 and the launch of a new web-based customer management suite in April 2000, which gave the Maxima Inc.s management the confidence that the implementation of the Oracle ERP system would be beneficial to Maximas own strategic plans for e-commerce. Subsequently, the top management purchased 50 licenses from Oracle for the implementation of the ERP system. Formation of the ERP Project Team In order to ensure smooth implementation, a cross-functional project team was formed after the ERP package was purchased. The team consisted of managers from the various departments of the subsidiaries, including Operations, Finance, Sales, and Marketing, as shown in Figure 2. The team was led by a newly appointed project operation manager. He brought with him ERP implementation experience, which was crucial as the team lacked such experience. Specifically, the role of the project operation manager was to lead the team and consolidate the requirements from each department and ensure their completeness. The team members provided the business process flow and defined the new processes to be used with the new ERP system. They were also responsible for understanding the functionalities of the Oracle system and defining how best the system could fit into the business processes of the company. They were empowered to make decisions and provide feedback on changes. Managers of the subsidiaries were responsible for the implementation of the new processes in their companies. The team members from the MIS department were not responsible for defining the processes. They helped the other members of the project team in the technical areas of the ERP system implementation. The project operation manager acted as the communication channel between the project team and the steering committee. The top management was updated about the project status through weekly reports prepared by the project manager. The project steering committee was drawn from the directors of Maxima Technology, Maxima Electronics, and Maxima Investment. The other subsidiaries were not involved in the first phase of the implementation. A major change to the team structure came in June 2000, when a new Chief Financial Officer joined the company and took on the role of project manager. Coincidentally, the project operation manager also decided to leave Maxima Inc. and his role was taken over by a project engineer. The new project operation manager, who was inexperienced in leading such a big-scale implementation, faced some co-ordination issues when he came on-board. In addition, the changes in project leadership brought about conflicting ideas over the processes that had been defined earlier.

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Figure 2: Project Team Structure

Selection of Implementation Partner Maxima Inc. had a small MIS department consisting of three employees with no experience in implementing ERP systems. Thus, Maxima Inc. decided to engage an external consultant to assist in the implementation. The Oracles representative recommended two consulting companies to Maxima: Solution Consultant (SC) and Global Consultant (GC). Oracle recommended SC as a more suitable choice between the two on the basis of SCs extensive implementation experience with Oracles products. On the recommendation of Oracle and SCs standing as a reputed IT service company, Maxima Inc. engaged SC as the consultant for implementing its ERP system. SC also had the advantage of having operations in the Asia Pacific region and an ISO 9001 certification. Due to the confidence of the Maxima Inc. management in Oracles recommendation, SC was given a free reign in selecting the five consultants to be assigned to the project. SC was responsible for application setup, system configuration and data conversion from the format of the legacy systems to Oracle-compatible data format. They were also to provide a three-month warranty period for the system after implementation, during which any arising problems were to be resolved immediately. Maxima also agreed with SC that there would be no software modification in the ERP system or any development work for interfacing the ERP system to the legacy systems. In addition, there were to be only five reports in the new ERP system that required customization. SC quoted a price of SGD$300,000 for the project. The project operation manager was to act as the interface between the project team and the implementation partner, passing on the process design mapped out by the project team to SC. Implementation Phase The project was based in Singapore. With the vision of having an integrated network, the management of Maxima Inc. assumed that the directors of each subsidiary would be able to provide the requirements of their respective subholdings in different countries and ensure that those requirements were properly addressed in the new business processes defined by the project team. However, the project did not progressed as expected by the management. In fact, the business processes of subholdings in different countries varied because they ran independently according to country-specific requirements. Furthermore, the respective directors from the various subholdings had not been consulted on the requirements of their units. As one of the directors commented, Why do we need to use an expensive ERP which does not fit well with our business processes at all? We are in the business of practicality; we do not need anything too fancy. Another major drawback was the integration of the ERP modules used by the subholdings in other countries. These modules required an affordable infrastructure to integrate with the head office in Singapore, which was not available in many developing countries in Southeast Asia where the
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subholdings operated. The subholdings also realized that the high cost of purchasing new hardware and software was affecting their expenditure budget and thus were reluctant to implement such changes. Although the problem was brought to the notice of the project manager and the steering committee, the top management decided to continue with the implementation. The management simply expected the subholdings to cope with the infrastructure issues that arose. The RMA module was important to Maxima Inc., as it would process information on returned goods. The company had been satisfied with the CIMOS system because it provided an easy and adequate system to track an item and monitor the inventory level. In CIMOS, it was possible to enter and track returned items with individual serial numbers through a batch identification code. Using the Oracle ERP package, however, users had to create a line item for each of the returned goods, which required greater effort in data input and was prone to errors. As commented by a user, It is often difficult to decide on the better choice when the best practices are compared with the competitive advantages of current practices. Initially the project team was eager to study the processes implemented in Oracles ERP package and was willing to change the companys processes accordingly. However, there were some processes that Maxima Inc. did not want to change as they were considered to be a competitive advantage. A good example of this is the finance module. Oracle used the weighted average method instead of FIFO for costing. Maxima Inc. had used FIFO, which had served the company well over the years. The Finance department initially agreed to use the average weighted method because SC insisted against modifying the ERP software to accommodate the use of the FIFO method. However, shortly after the implementation, the Finance department realized that FIFO was a better choice and convinced the MIS department to make the necessary changes. The available workarounds were tedious and increased processing time. For example, in the new system, to create a return order, they would have to do 40 steps compared to 16 in the legacy system. As a result, the RMA module was dropped from the project scope. One of the users of the RMA module commented, If JD Edwards were deployed, they could have customized the package to meet our business requirements. Also, JD Edwards is well known in the distribution industry whereas Oracle is more popular among manufacturing companies. This became a serious problem. Since the project team was itself not convinced that the best business practices defined in the Oracle ERP package could fully support the business processes of the company, they could not convince users to accept the processes in the new ERP system. Incompetent SC Consultants During the course of the implementation process, Maxima Inc. was frustrated by the inexperience of the SC consultants. One of the five consultants assigned to the project was experienced in the ERP system, while the rest were fresh graduates who had recently joined SC. The consultants were also frequently replaced by SC, which led to discontinuity in project implementation knowledge. Often, the consultants took a long time to answer queries from users at Maxima Inc. during the implementation process. The project manager observed, They were not confident in answering our questions; they seemed to have no experience in this type of projects, and often took a few days to get back to us. The consultants also did not have the required knowledge in the distribution process, RMA and finance modules. In fact, it was the first time SC was implementing the RMA module of the ERP system. The consultants were undergoing training at Oracle even as they were implementing the system at Maxima Inc. The consultants also failed to provide useful suggestions on process
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improvement, best practices and business requirements. For example, as a project member observed, the workaround solutions suggested by the consultants proved useless to Maxima Inc. To make matters worse, the consultants lack of technical knowledge in handling tape backup led to the test server being down for a long time, causing project delays. However, despite the unhappiness between the project team and the consultants, the management of Maxima Inc. took no action, assuming SC was sufficiently qualified to handle the project. When the new project manager took over the implementation project, matters became worse between the two sides. Yet, the management refused to intervene, letting the project continue with all its problems and delays. End Users Involvement The end users were not involved in the requirement mapping or detailed design phases. The users first contact with the project was during the user acceptance test, and that was when problems began to surface; the users did not agree with the new processes defined by the project team, even though their department managers were part of the project team. According to an informant, The issues were partly caused by the managerial approach to business operation without proper attention to details. Although the organization was small, the managers overlooked some of the details such as returns management through batch identification, which led them to define a tedious business process in the new system. Data conversion is a necessary process when any new system is introduced. This process becomes complex when it involves various systems and data formats. Due to the different system formats at Maxima Inc., data had to be exported to spreadsheets and reformatted before it could be imported into Oracle. This was a manual process and was prone to errors. SC provided minimum support in the data conversion exercise, insisting that data conversion was not part of its contract with Maxima. The project team encountered many problems with data conversion due to their lack of experience with the new system and the data mapping that the conversion process entailed. The data migration exercise was not successful. Only a part of the master data was converted correctly. The rest, which included purchase orders, invoices and financial data was manually reentered into the new system over a six-week period. Until the data was entered successfully, the ERP system was not fully functional. The company also incurred extra cost as temporary staffs were hired to do manual data entry. The Final Verdict After 6 months of hard work, the ERP system was ready for production use. No customization was done to the Oracle ERP package except for the layout changes for the five reports as agreed to in the beginning. However, only 60% of the modules were implemented. As a result, it was not possible to replace all the legacy systems, contrary to what the top management had initially hoped for. The ERP modules that were not implemented included the human resource module, and more importantly, the RMA module, which had been expected to be the crucial module in the new system, supporting the companys core capability and business processes. Also, the ERP system was only implemented in Maxima Inc., Maxima Technology, and Maxima Investment. The other subsidiaries and subholdings pulled out of the project for various reasons. In another setback, some bugs were found in the ERP system after implementation. It was later discovered that the problem was related to the earlier version of the system that SC had implemented instead of the version stated in the contract. SC, however, disputed the link between the bug and the version of the system that had been implemented. It also did not recommend upgrading the system because of the tedium involved. The project team was very disappointed with the situation, but had no choice other than to accept the older version of the system.

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Not all the modules passed the user acceptance test; some modules were not signed off, as their users were not satisfied with the results from the new system. This was largely because their requirements had not been properly mapped. As a user stated, I could still remember when the system was first made available: we were having problems in consolidating the data in the same way as the legacy system, especially in the service module. This contrasted with the proposed benefits of the new system in consolidating data within the organization. Post-implementation Phase: A Reflection As part of the wrap-up of the ERP implementation project, the project team provided feedback to the top management on the overall implementation process. However, due to the hierarchical structure of the organization, users feedback on implementation-related issues was slow in reaching the top management, and often, filtered. Change in Project Management Leadership and Disruption in Project Knowledge Transfer The change of project manager and project operation manager contributed to the problems in implementation. No proper handover was made during the change in project leadership. Also, due to different working styles, there were conflicts between the project manager and consultants. The strained relationship further deteriorated when SC was unable to recommend a good solution for the service module and insisted that no customization should be done to the system. There was no knowledge transfer between the implementation partner, SC, and Maxima Inc.s project team. Transfer was supposed to have taken place in the project phase but it was called off due to the tight implementation schedule and delays. As a result, Maxima Inc. would be very dependent on external consultants, should it decide to create a new subsidiary or subholding that the ERP system must cater to or reconfigure the implemented system. Contract with Vendor There were constant disputes over the contract between Maxima Inc. and Oracle. First, there was the licensing issue. Licenses for Oracle were purchased even before the project started. Maxima Inc. assumed the licenses purchased were sufficient for its implementation of the system. However, there was a need for more licenses in order to enable adequate access to the subholdings of Maxima Inc., and there were restrictions to certain modules of the ERP system (attached to the licenses purchased earlier by Maxima Inc.). The cost over-run in licensing was not anticipated by Maxima Inc.s management. Another dispute arose over the maintenance contract. The maintenance contract was part of the initial agreements signed in May 2000. The top management of Maxima Inc. had overlooked the issue and only realized later that they would require support from Oracle after the system went live. Upon further negotiation with Oracle, the annual maintenance cost came up to S$45,000.Within six months of the implementationin May 2001Maxima Inc. decided not to renew its maintenance contract. Subsequently, the downturn in the economy forced the management of Maxima to rethink its ecommerce strategy and the vision of having a complete network extending to all subsidiaries of the company. As implementation was unsuccessful, the subsequent phases of the project plan were put on hold. As the project had been managed in a big-bang approach, it was almost impossible for Maxima to revert to its old systems.

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Maxima Inc. Author Information Shan-Ling Pan Department of Information Systems School of Computing, National University of Singapore 3 Science Drive 2 Singapore 117543 Email: pansl@comp.nus.edu.sg Tel: (65) 65166520

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Shan-Ling Pan is the coordinator of the Asian IT Case Series, NUS. He is a faculty member in the Department of Information Systems, School of Computing, National University of Singapore. His research interests include enterprise system implementation, eGovernment, IT-enabled organizational transformation and knowledge management. As a case study researcher, Dr. Pan has conducted and published more than 30 case studies on Asian organizations. He has published two case books in 2004 and 2006: Managing Strategic Enterprise Systems and E-Government Initiatives in Asia: A Casebook and Managing Emerging Technologies and Organizational Transformation in Asia: A Casebook. Mahdieh Taher Research Assistant Asian IT Case Series School of Computing National University of Singapore Email: isct1088@nus.edu.sg Tel: (65) 84091047 Mahdieh Taher is a research assistant at the Asian IT Case Series, NUS School of Computing, NUS. Her research interests are e-Government, Analysis and Design of Information System, Information Technology Management, and IT Strategic Planning. Her research has been published in the Journal of Information Technology Era, IEEE International Workshop and International Electronic City Conference. She has also worked closely with Global360 Corporate.

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