application of value engineering and six sigma methodologies to the ...

APPLICATION OF VALUE ENGINEERING AND SIX SIGMA METHODOLOGIES TO THE ERP SYSTEMS IMPLEMENTATION Larry Jung-Hsing Lee Dept. of Business Administration, National Central University Taiwan [email protected]

Jun-Der Leu Dept. of Business Administration, National Central University Taiwan [email protected]

C. Jimmy Shih GMD-IT, Tatung Co., Ltd Taiwan [email protected]

ABSTRACT ERP is one of the effective issues for enterprise reengineering. Through information technology, ERP is a software package which includes financial management, production management, human resource management, supply chain management, etc. Due to management mistakes, process chaos, resisting changes, and less training, the functions of ERP are not used well. The paper proposes a method by using Value Engineering and Six Sigma to adjust ERP systems for better performance. With function analysis of Value Engineering and DMAIC of Six Sigma, the proposed method reviews processes of ERP and finds out key functions to develop alternatives for adjusting ERP systems. The results of cases show the method can get better ERP systems.

KEYWORDS Value Engineering, Function Analysis, Six Sigma, ERP, Information Technology.

1. INTRODUCTION To compete in the world market, an enterprise needs to become a strong organization equip with various strengths. ERP system is one of them. Not only big companies need it, but also medium- and even smallsize companies need it. According to Yusuf et al. (2006), competitions in the Chinese ERP market will come to a new depth. Owing to the increase of Chinese domestic ERP manufacturers, overall cost of implementing ERP declines sharply, and ERP products with reasonable prices begin to appear in the market. Manufacturers make big breakthroughs

in product maturity and service capability, which further reduces risk of implementing ERP. However, the risk of failure is still presented. Thus, we propose a VE and Six Sigma model for gaining better value from implementing ERP system in an enterprise. Through literature review, we examine ERP, Value Engineering, and Six Sigma. Then we propose a framework of valuing up the implementing process and describe in detail on the processes. The results and discussions section provide examples for every phase of the VE with Six Sigma, and deeper literature review is performed to gain more advanced information. The results show the model is feasible for adjusting ERP system. Then we conclude that this method not only can be used in ERP implementation, but also can be used in other fields.

2. LITERATURE REVIEW 2.1. ERP Enterprise Resource Planning (ERP) systems, are usually developed as individual standalone monolithic applications or modular separable tools assembled in a Suite structure for all individual business needs. ERP systems were formed as integrated standalone software systems incorporating materials requirements planning, accounting, order entry, distribution and shop floor control functionalities (Tarantilis et al., 2008). ERP is a software package that attempts to integrate all departments and functions of a company onto a single computer system that can serve all different departments’ needs. The current generation of ERP systems provides reference models or process

templates that claim to embody the current best business practices by supporting organizational business processes (Valerie and Millet, 2006). Jensen and Aanestad (2007) introduced the notions of hospitality and hostility as a sensitizing device for studying and understanding adoption processes. Law and Ngai (2007) confirmed relationships (such as the relationships between senior management support and the extent of business process improvement, and between CEO-IT distance and senior management support for IT initiatives) that exist among ERP success. They also demonstrated that system-level and organizational outcomes were subject to the influence of the firm’s strategic intent and objectives when adopting ERP systems. The rewards of a successful implementation are immense. Lozinsky (1998) states that operating costs will be reduced, improved access to information will make possible more agile decision making for better negotiating with customers and suppliers; with no need for rewriting reports, reliable figures will be available to analyze business performance. ERP systems are expected to reduce costs by improving efficiencies through computerization, and enhance decision making by providing accurate and timely enterprise-wide information. Some of the most significant intangible benefits include internal integration, information and processes improvement, and betterment of customer service, while major tangible benefits cover cost effectiveness in inventory, personnel, procurement; improvements in productivity, cash/order management, and overall profitability (Chien and Tsaur, 2006). The success of ERP systems implementation can be measured on four dimensions: user satisfaction, individual impact, organizational impact, and intended business performance improvement (Zhang et al., 2005). Wu et al. (2007) presented an approach for identifying goal (enterprise level), functional (scenario level), data, and output misfits (activity level) in ERP selection. ERP systems are one type of integrated information system to cover all necessary business processes, thus system quality, information quality, and service quality need to be included in success model. Information quality is measured in terms of accuracy, timeliness, completeness, relevance and consistency of the information provided by ERP. System quality is measured in terms of ease-of-use, functionality, reliability, flexibility, data quality, and integration of ERP systems. Service quality is measured in terms of ERP service level, reliability of ERP service, and

responsiveness and assurance of ERP service providers (Chien and Tsaur, 2006). Chang et al. (2007) propose that individual factors, technological factors, and organizational factors will affect ERP usage. Individual factors consist of perceived nearterm consequences, perceived long-term consequences, and affect. Technological factors include complexity and compatibility while organizational factors include facilitating conditions and social factors, shown in figure 1.

Figure 1 Research Model of ERP (Chang et al., 2007)

From the survey on ERP implementation difficulties in Chinese enterprises, most of respondents thought ‘‘Support of top management’’ was the most important issue to decide implementation’s fate, then ‘‘Costly and time-consuming’’, ‘‘Cultural differences’’, ‘‘Technical complexity’’, and ‘‘Lack of professional personnel’’ were ranked as very serious problems. Only ‘‘Inner resistance’’ was identified as a moderate trouble by respondents (Yusuf et al., 2006).

2.2. Value Engineering The value methodology is commonly applied under the names Value Analysis (VA), Value Engineering (VE), and Value Management (VM). These terms can be used interchangeably with value methodology throughout the standard and this document. Other value improving processes also qualify as value

Figure 2 Value Study Process Flow Diagram

studies as long as they adhere to the Value Standard’s Job Plan and perform Function Analysis as part of their total process, shown in figure 2. A value study is to improve the value of a project (SAVE International, 2007). Value Management (VM) has evolved out of previous methods based on the concept of value and functional approach. Value Methodology is pioneered by Lawrence D. Miles in the 1940's and 50's. Miles developed the technique of Value Analysis (VA) as a method to improve value in existing products. In the beginning, VA was used primarily to identify and eliminate unnecessary costs. However it is equally effective in increasing performance and addressing resources other than cost, when the application of VA widened beyond products into services, projects and administrative procedures (IVM, 2003). Leeuw, (2001), says that VM is not a conflict orientated design review, a cost cutting exercise, and a standardization exercise (Leeuw, 2001). Lee, 1997, describes the process of VE in manufacturer according to the SAVE International standard. The Value Methodology uses a systematic Job Plan which consist specific steps to effectively analyze a product or service in order to develop the maximum number of alternatives to achieve the product or service’s required functions (Lee, 1997). Following the Job Plan will assure maximum benefits while offering greater flexibility.

2.3. Six Sigma Six Sigma means there are only 3.4 defects per million parts. This has emerged as the benchmark for high quality - fewer than 3.5 defects per million. Six Sigma is a mathematical measure of faulty parts per million pieces manufactured, with Six Sigma being perfection - or pretty close to it (Slater, 2000). Six Sigma focuses on reduction of defects and variation and drives towards excellence measured in terms of defects per million opportunities (Knowles et al., 2005). Six Sigma offers a process that defines measures, analyzes, improves and controls existing processes, and designs and verifies new processes or products that are trying to achieve a higher quality (Cobo, 2006). The successful implementation of SixSigma depends on committed and effective

Knowledge Generation Function Analysis Alternative Creation Development phase Execution

Figure 3 VE and Six Sigma Model

leadership. Also, it is very important to combine the right projects, the right people and the right tools (Wang et al., 2004). GE’s (General Electric Company) rules for implementing Six Sigma (Slater, 2000): (1). Become an aggressive team member of a quality project and show your bosses that you care deeply about quality. (2). Probe, measure, improve, and analyze to get your products and processes up to Six Sigma standards. (3). To ensure the long-range success of Six Sigma, you must monitor all aspects of the quality program well into the future. (4). Designate team members for specific roles in the quality effort, and then reward those players generously for their involvement.

3. METHODOLOGY From the literature review, we know ERP systems can benefit much to enterprises. However, for the complication of ERP, enterprises might spend great money but gain a little or even loss. VE and Six Sigma are useful tools for improvement from the literatures. Therefore, we propose a VE and Six Sigma model to deal with implementing ERP system, hoping that the model will bring better value for enterprises. The VE and Six Sigma model is shown in figure 3.

3.1. Knowledge Generation A cross-function team will be formed for VE study. The team should be leaded by an experienced VE professional, CVS (Certified Value Specialist) is better. Related information will be collected by the team, including ERP establishing procedures, case studies, budget, etc. Costs analysis, Failure Mode and Effect Analysis (FMEA), and fish-bone diagram will be produced by this VE study team. From ERP implementing procedures, we can set a plan, control the progress, and find the critical processes for deeper analysis. Case studies help us to know success stories about ERP implementation, and barriers. FMEA helps us to look up the important points, which might be failed and affected to whole organization. Fish-bone diagram assist the team to do brainstorming and figure out some important criteria of ERP implementing. Define, Measure, and Analyze of Six Sigma skills will produce better quality results.

Through above processes, some useful knowledge will be generated.

3.2. Function Analysis Function analysis is very important in value study. The knowledge generated by last phase will be processed in this phase. The purpose of function analysis is to identify what we are trying to do and also identify the associated cost. The functions are described by verb + noun, such as function of pipe = transit fluid. To determine value index, the formula is VI = function cost / function worth. Function cost is allocated by real cost, while function worth is the least cost required to perform the function. So, the higher of VI will provide wider space for improvement. Functional analysis systems technique (FAST) is an effective tool for evaluating existing procedures, structures or other objects. It also serves as a problem solving technique by identifying the required functions to perform. After function analysis phase, key functions will be identified.

3.3. Alternative Creation Alternative creation phase will focus on key functions to accelerate as many ideas as possible by team members. The guidelines for creativity are: dare to be apparently illogical; overcome inertia toward change, toward the unconventional; realize that insight dose not necessarily flow from a plan or a logical sequence; remove all mental blocks and personal inhibitions; let the imagination grow; it helps to have crazy ideas; they should be encouraged and not ridiculed; remember - all truly great ideas seem absurd when first proposed.

3.4. Development Phase The objective of development phase is to develop workable alternatives from selected ideas of creation for making decisions by designer or management. The rules of development are: (1) Each alternative has to be deeply analyzed to assure meeting the user’s requirements. (2) The appropriation of technology has to be decided. (3) To prepare quotations, schedules and tests. (4) The necessity and affection of changing design has to be considered. (5) To construct good human relations. (6) Every involved study team member has to be concerned since the beginning of the Information Phase. (7) To develop surely specific alternatives. (8) To prepare persuasive materials. The main stages of development phase:

z 　 To develop pilot design of selected ideas. z 　 To prepare presentation materials of the alternatives. z 　 To explain the changes and compare their strong & weak points. z 　 To collect quotations. z 　 To analyze and compare the Life Cycle Costs. z 　 To select alternatives. z 　 To prepare execution plans.

3.5. Execution The purpose of this phase is to ensure accepted value alternatives are executed and that the benefits projected by the Value Study have been realized. The processes are: (1) Review the preliminary report. (2) Conduct an execution meeting to determine the disposition of each value alternative. (3) Establish action plans for those alternatives accepted and document the rationale for the rejected alternatives. (4) Obtain commitments for execution. (5) Set a timeframe for review and execution of each value alternative. (6) Track value achievement resulting

from implemented alternatives. (7) Sign off deliverables. (8) Validate benefits of implemented change. (9) Ensure that new practices become embedded by establishing and managing an execution plan.

4. RESULTS AND DISCUSSION For better implementing an ERP system, we formed a VE study team to proceed according to the VE and Six Sigma model. The team gathered 8 hours a week for discussion on the implementation of ERP, from knowledge generation, function analysis, alternative creation, development, and execution to adjust ERP system for betterment.

4.1. Knowledge Generation The VE study team was formed by different units, including MIS, finance, procurement, production, IE, QC, and outside consultants. Besides the training courses by outside consultants, we also had a 40-hour VE Module I training workshop. The content of VE Module I training course is shown in Table 1.

Table 1 Content of VE Module I Training Course Date

Time 9:00-12:00

Day 1 13:00-16:00 9:00-12:00 Day 2 13:00-16:00 9:00-12:00 Day 3 13:00-16:00 Day 4 9:00-12:00 13:00-16:00 9:00-12:00 Day 5 13:00-16:00 9:00-12:00 Day 6 13:00-16:00 9:00-12:00 Day 7

13:00-16:00

Item 1.Kick off, course explanation 2.VE introduction and examples; Habits, Roadblocks and Attitudes 3.Job Plan and Cost Model 4.Team Discussion-Information Phase 1.Function Analysis 2.Team Discussion-Information Phase and Function Analysis 3.Function Analysis of Systematic Technology (FAST) 4.Team Discussion - FAST 1.FAST 2.Team Discussion – FAST Diagram 3.Function Cost, Value Index 4.Team Discussion – Function Cost, Value Index 1.Team Cooperation, Collaboration and Human Relations 2.Creative Thinking 3.Team Discussion – Creation Phase 1.VE Management 2.Team Discussion – Creation Phase 3.Evaluation Phase 4.Team Discussion – Evaluation Phase 1.Development Phase and Life-cycle Cost Analysis 2.Team Discussion – Development Phase 3.PresentationPhase 4.Team Discussion-Presentation Phase 1.Team Discussion-Presentation Phase 2.Results Presentation 3.Certification and Discussion

People

Don’t Understand

Resisting Change

quality, reliability problems of service quality, and responsiveness problem of service quality. The actions taken are communication, training, and incentive program, the content is shown in table 2.

Software

Inflexibility

Bugs

installed ERP Execution New Procedures are not Defined Execution Plan is Never Updated

Methods

Server too Small

Out of Date

Hardware

Figure 4 Fishbone Diagram of Stalled ERP Execution

In this phase the team collected a lot of information related to ERP, VE, and Six Sigma. For learning more on ERP, the team used brainstorming and produced a fishbone diagram, shown in figure 4. There are 4 items which affect installed ERP execution, including software, hardware, methods, and people. In software, we should concern about inflexibility and bugs; in hardware, we should concern about server too small and out of date; in methods, we should care about new procedures are not defined; and in people factor, we should notice about don’t understand system and resisting changes.

From the paper of Valerie and Millet (2006), an ERP system is an integrated software package composed by a set of standard functional modules (Production, Sales, Human Resources, Finance, etc.), developed or integrated by the vendor, which can be adapted to the specific needs of each customer (Shown in figure 5). From John et al. (2006), they show the knowledge sharing during ERP implementation, which includes basis of truth and rationality, motivation, orientation to change, orientation to work, orientation to collaboration, control, coordination, and responsibility, orientation and focus, and nature of time horizon, shown in figure 6. The team gain more knowledge from the information and literatures and will dig deeper for improvement.

Then the team worked on Failure Mode and Effects Analysis (FMEA). The team focused on three important quality items, which are information quality, system quality, and service quality. Through the discussion, the higher four potential failure modes in sequence are reliability problems of information quality, timeliness problems of system Figure 6 Knowledge Sharing of ERP (Jones et al, 2006)

Through VE and Six Sigma, the team generated related knowledge, including ERP definitions, important criteria affecting ERP execution, some failure modes needed to take advanced actions, and processes quality improving by Six Sigma.

Figure 5 ERP definition (Valerie and Millet, 2006)

Table 2 FMEA of Establishing ERP POTENTIAL FAILURE MODE AND EFFECTS ANALYSIS (PROCESS FMEA) FMEA Date (Orig.): Establishing ERP

Product/Process

R.P.N.＝SevＸOccurＸDetect

Date (Rev.): Page：

Core Team

O c c u r

Current Process Controls

D e t e c t

R . P . N .

Product Process

Potential Failure Mode

Potential Effect(s) of Failure

S e v

Potential Cause(s)/ Mechanism(s) of Failure

Information quality

not accuracy

wrong outputs

8

wrong inputs

4 manual rules

3

96

timeliness problem

can't get in time information

8

delaying

6 manual rules

4

192

completeness

wrong outputs

8

shortage of information

3 manual rules

3

72

difficult to use

can't get in time information

8

system design problem

reliability problems

unstable

unflexibility

can't deal special jobs

6

waiting for service

responsiveness problem assurance lacking

System quality

Service quality reliability problems

Actions Taken

training

4

negotiation

3

96

5

contract

4

200 communication

system design problem

4

negotiation

4

96

8

vendor's problem

6

contract

4

192

losing money

9

contract problem

4

contract

4

144

losing money

9

communication problem

3

contract

3

81

10 hardware problems

incentive program incentive program

Table 3 Function Analysis of Establishing ERP Function Analysis Phase

Function Analysis

Project Name: Establishing ERP Item: Concrete Engineering Sub Item Software Hardware

1 Page of 1 pages

Function(1)

Worth

(2) 6,413,799

(3) 3,285,000

Cost/Worth Comments

Verb Provide

Noun Modules

Process

Data

S

10,980,415 9,637,825

1.1

Accept

Inputs

B

3,087,906

1,872,560

1.6

3

Print

Outputs

S

3,830,424

2,078,638

1.8

2

Adjust

Systems

B

1,119,626

853,670

1.3

Personnels

S

190,792

163,000

1.2

Problems

S

40,406

50,230

0.8

Consulting Train Solve (1)B = Basic Function

Kind B

Initial Cost

(2)Initial Estimated Cost

2.0

1

(3)Lowest Cost

S = Sub Function 　RS = Required Sub Function

4.2. Function Analysis After gained knowledge from previous phase, the team figured out three important items (software, hardware, and consulting) for function analysis.

Through the procedure of function analysis by using verb + noun to describe item and related initial costs and worth, the team finished the function analysis shown in table 3. The key functions are “provide modules”, “print outputs”, and “accept inputs”.

4.5. Execution 4.3. Alternative Creation In this phase, the VE study team used brainstorming, checklist methods, and other creation methods to create as more alternatives as possible. The main points can be improved are on software and hardware. There are so many modules in ERP. We don’t need to install them in one time. How can we select them? Can we get different ways of service? What kind of hardware we need? Can we have different solutions? The team started to find different ways again through further literature reviews. According to Tarantilis et al. (2008), ERP Web Services offer two crucial advantages: ease of integration and cost reductions through the hosted application model. Integration is a major source of expenditure for enterprises due to business software system complexity. Zrimsek (2003) states that ERP II is an evolution from ERP that extends business processes, opens application architectures, provides vertical-specific functionality and is capable of supporting global enterprise-processing requirements. How ERP II will lead to either cost leadership or product differentiation would ultimately depend on the position of the dominant players and their strategic policies, but operational, managerial, infrastructural and organizational benefits should aid in setting the context right. Software as a service (SaaS) has moved quickly from a peripheral idea to a mainstream phenomenon. SaaS is such an innovation by bundling traditional software product with service over the Internet. Companies are experimenting new ways to utilize the Internet and offer products and services to satisfy diversified customer groups (Fan et al., 2008). From above literature reviews, we found that we can choice web-based service, ERP II, or SaaS ways for installing ERP systems.

4.4. Development Phase After go so many alternatives for establishing ERP systems, the team screened those ideas by using evaluation methods of VE to select feasible alternatives for development. For sure, using new technologies and service ways can get more efficient results, lower costs, and higher satisfaction. This phase will set up final executive plans to persuade management to accept the final alternatives.

This phase reviewed the preliminary report, conduct execution meeting to determine the disposition of each value alternative, establish action plans for those alternatives accepted, obtain commitments for execution, set a timeframe for review and execution of each value alternative, track value achievement resulting from implemented alternatives, sign off deliverables, validate benefits of implemented change, and ensure that new practices become embedded by establishing and managing an execution plan.

5. CONCLUSIONS This paper proposes a good model for implementing ERP system by using VE and Six Sigma. By literature reviews and deeper reviews, can get more useful knowledge. Through the step of the proposed model, the results show that this model is workable and can be even adapted to other fields for value improvement.

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