Information Systems Analysis

AN AHP-BASED
APPROACH TO ERP
SYSTEM SELECTION
GROUP 4
Koushik Hati
Amit Kumar
Meet Kumar Dagli
Josyula Sree Divya
Lav Kumar Jha
Revadhi N
Riom Sen
Sanchit Jain
Saurav Rai
TABLE OF CONTENTS

01 Introduction and ERP System Characteristics

02 Selection method Review
03 Procedure for selecting a suitable ERP System
04 Fundamental Objective Hierarchy and Means-objective Network
05 Practical Example from the Industry
06 Paired Comparison Judgement Matrix
07 Evaluate the ERP system using the AHP Method
08 Conclusion
 01
INTRODUCTION AND ERP SYSTEM
CHARACTERISTICS
Enterprise resource planning (ERP) is important in modern business, to integrate the flow of material, finance,
and information and to support organizational strategies.

In simple terms Enterprise Resource Planning helps to streamline a business’s different sectors whether it’s a
mixture of finance, human resources, sales, manufacturing, logistics and more.

Instead of using multiple programs for all the different sectors of your business, an ERP system simply allows for
a business to operate in a one-stop-shop system.

Systems like ERP, offer customizability to what your office actually needs to thrive. The size of the system can
change depending on your business as well as the modules you use to help your operations.

ERP system software are customized based on business requirements of each company.

ERP adoption involves initiating appropriate business process changes to significantly enhance performance,
quality, costs, flexibility and responsiveness.
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ERP SYSTEM CHARACTERISTICS
An Integrated System
Before to maintain and keep track of all of a business’s operations, a business may be using multiple systems like CRM
(customer relationship management) software, an HR software, payroll software and so on. An ERP system can be
customized to fit in all the software in one place that will help run your business in one uniformed program.

The system Operates in (or near) real-time

Depending on the job it is tasked with, most ERP systems run on real time or close to real time. That means when in
putting data, or maybe even doing something as simple as an inventory check, the system will be up to date.

A consistent look and feel across modules

Having an all-in-one system helps so that you’re not having to learn and remember where all the tools you need to get
the job done are located on what program. With ERP, a business only has to worry about the one interface and the
modules within.

Multiple Deployment Options

On-Premises – servers would be located within the offices.
Hybrid – This means that there may be servers on site but the system may also be hosted through a service online.
SaaS – SaaS (Software as a service) would have the ERP as stored and accessible on a subscription-based service much
like the Cloud.
 03

SELECTION METHOD REVIEW

Pethora of methods involved in selecting ERP / IS :

Scoring Ranking

Mathematical Multi-criteria
Optimization decision analysis

Scoring Method : Ranking Method :

Intuitive Compares computer projects
Simple Limitations similar to scoring method
Not a true reflector of decision maker's opinions

Mathematical Optimisation :
Goal programming
Non-Linear programming - optimizing resource allocation in IS project
0-1 programming - selection of IS project
 04

SELECTION METHOD REVIEW

Pethora of methods involved in selecting ERP / IS :

Scoring Ranking

Mathematical Multi-criteria
Optimization decision analysis

Multi-criteria decision analysis :

0–1 goal programming model to select an IS project

Factoring multiple criteria : Weak applicability due to:

Benefits Complex mathematical models
Hardware & software Limited attributes of real world ERP selection decisions
Other costs Methodologies focused on quantifiable calculations
Risk factors Methodologies look down upon selection framework of
Preferences of decision makers and users ERP system
Completion time
Training time constraints
 05

SELECTION METHOD REVIEW

AHP Method :
Introduced by Satty in 1980
Deals with multiple criteria decision making Prioritises a set of alternatives
Provides relative importance of attributes

Previous Work done using AHP method:

Goal programming - IS selection ; determining relative weights of attributes & applying these weights,
Schniederjans and Wilson (1991) Selecting a multimedia authoring system, Lai et al. (1999)
Selecting an ERP system, Teltumbde (2000)

Focus of this case/paper :

Evaluating ERP systems
Proposing systematic procedure to construct the objective structure taking into account company strategies
Extract the associated attributes for evaluating ERP systems
Synthesizing decision makers’ tangible and intangible measures by analytical framework of AHP

PROCEDURE FOR SELECTING A
SUITABLE ERP SYSTEM
Project Team Formation and Information Collection
Forming a team with members from top management,
functional experts and senior members of user department.
Collection of information on ERP system and the vendor.
Identify ERP system characteristics
Deciding upon the business and technical reasons.
Identifying the stakeholders.
Finding out associated risks and constraints.
Structuring the objectives
Defining the system scope and aligning with business
objectives, company policy, business attributes and external
environment.
Strategic objectives are divided into fundamental objectives
and means-objectives.
Objectives are organized in a hierarchy by either top-down
decomposition or bottom-up synthesis
Discuss the results and make the final decision
06
Extract the attributes used for evaluation
Derive quantitative and qualitative attributes pertinent to
evaluation of each ERP system.
Select attributes consistent with objective framework and
company strategy.
Iteratively examine and modify selected attribute set so that they
are complete, decomposable, nonredundant, measurable and
minimal.
Screen the unqualified ERP systems
Detailed characteristics desired by company for ERP are
developed.
Characteristics are transformed into requirements to form a
questionnaire or checklist.
Vendors provide information on the questionnaire, which is
assessed to eliminate unqualified systems.
Evaluate the ERP systems by using the AHP method
AHP involves 3 phases:
Decomposition – Development of AHP Hierarchy Model from
fundamental objective hierarchy.
Comparative judgements – Utilization of paired comparisons
for attributes and alternatives to extract judgement
matrices.
Synthesis of priorities – Repetition of paired comparison
process for each attribute.
 07
FUNDAMENTAL OBJECTIVE HIERARCHY

Fundamental-objectives are those that are important because they reflect what the decision
makers really want to accomplish.
Fundamental-objectives are organized into a hierarchy and indicate directions in which the
project team should strive to perform better.
When organizing the hierarchy of fundamental-objectives, the project team must keep in mind
to pay attention to the limitations of decision elements and the alternation of business
environment at any time.
Two methods can be used to establish the hierarchy of ERP system fundamental-objectives,
namely top-down decomposition and bottom-up synthesis.
 08
FUNDAMENTAL OBJECTIVE HIERARCHY

In the top-down decomposition procedure, the project team

discusses ‘‘What do you mean by that upper-level objective?’’ The

answers reveal the lower-level fundamental-objectives, which

explain the meanings of the upper-level objective.

Alternatively, managers can start from a lower-level objective by

asking, ‘‘Of what more general objective is this aspect?’’ to find a

more general objective and move upwards via the bottom-up

synthesis procedure. The upper levels in the hierarchy refer to

more general objectives and the lower levels contain important

elaborations of the upper objectives.

 09
MEANS-OBJECTIVE NETWORK

Means-objectives are those which help the fulfilment of other objectives (Clemen, 1996).
Means-objectives are organized into networks (Clemen, 1996).
The project team can create a means-objective apart from the fundamental-objectives by asking, ‘‘How could you
achieve this?’’ The answers to this question identify the corresponding means-objectives and describe the linkages
among them.
It helps to obtain a linkage between Means and Objectives ( Cause- Effect Relationship)
Project team links a means-objective toward the corresponding fundamental-objective by asking the question ‘‘Why
is that important?’’ Having formulated these means-objectives, the project team can ensure specific ways of
accomplishing the fundamental-objectives.
Additionally, the team can narrow the set of ERP candidates by examining these means-objectives and also develop
detailed attribute specifications to assess the ERP systems.
MEANS-OBJECTIVE NETWORK 10
 11
PRACTICAL EXAMPLE - HSINCHU
SCIENCE PARK

Applied to an Electronics company, Hsinchu Science park - Manufacturer and

Exporter of Modular Microwave Communication Systems.

Key Issues Of Fragmented Modules of Existing ERP

Limitation on Company ’ s operating efficiency.
Duplication of Effort and Confused Business Processes.

Step 1 - Identify the ERP system characteristics

Diversified committee of senior managers - GM, MIS and Purchasing
Formulation of project plan, integrate project resources and select suitable ER system.
Numerous valuable recommendations have been proposed during this phase.
Key elements for discussion - Goals of ERP implementation, Project Scope,
Organizational strengths and weaknesses, Potential alternatives

Step 2. Organize the structure of Objectives

Process of constructing the objective structure of ERP system selection was both
dialectic and analytic.
 12
PRACTICAL EXAMPLE

Strategic Objectives
To satisfy business strategy
To enhance business process performance
To improve operations quality and efficiency
To shorten turn-around time to the customer
To support globalization development

Fundamental Objective Hierarchy and Means-Objective Network:

Ultimate goal - Lower level Fundamental Objectives - Measurable
objectives.
Top-down decomposition approach -to construct the Fundamental
Objective Hierarchy.
Mean Objective network - bottom objectives to obtain a linkage between
Means and Objectives ( Cause- Effect Relationship).
Clear requirements -to identify the system functions and clarify the gap
between the ERP system and the existing operations procedure
MEANS-OBJECTIVE NETWORK 13

System Vendor
factors Factors
 14
PRACTICAL EXAMPLE

Step-3. Extracting attributes for evaluating ERP systems

Representatives from different user departments in the project
team were divided into research groups to gather and evaluate
the ERP system data.
The evaluations from the research groups were discussed in a full
assembly of the project team.
The three major decision makers then combined the suggestions
of each research group with their subjective opinions to evaluate
the alternatives.

The fundamental - objective hierarchy was modified to

generate an AHP hierarchy. This AHP hierarchy is
composed of four levels:-
Level 1 reveals the strategic objective for selecting
the most suitable ERP system.
Level 2 consists of two main objectives, namely
choosing the most appropriate ERP system and
selecting the best vendor.
 15
PRACTICAL EXAMPLE

Level 3 contains the associated

attributes that are used to
measure various ERP systems
and vendor, respectively.
Level 4 consists of the alternative
ERP systems.

Detailed description of the

attributes in the AHP model with
the associated means is extracted
from the means objective network
 16
PRACTICAL EXAMPLE

Detailed description of the attributes in the AHP model with the associated means is extracted from the means
objective network
 17
PRACTICAL EXAMPLE

Step 4. To screen ERP alternatives: -

Eliminated unfavorable alternatives after thorough examination of system
specifications and requirements derived from the means-objective network
After preliminary screening, three systems A, B, and C, were selected and
requested to provide detailed proposals for further consideration.
Intensive interviews and working meetings were scheduled with each vendor.
Core business workflows and special requirements of the company were
assessed by running demo scenarios.
Unit tests were conducted by User representatives related to system feasibility
 18
PRACTICAL EXAMPLE
 19
PAIRED COMPARISON JUDGEMENT
MATRIX
System Factors
Implementation User
Total cost Functionality Flexibility Reliability
time Friendliness

Total cost 1.00 0.33 0.33 1.00 0.20 4.00

Implementation
3.00 1.00 0.25 3.00 0.33 6.00
time

Functionality 3.00 4.00 1.00 7.00 3.00 9.00

User
1.00 0.33 0.14 1.00 0.20 3.00
Friendliness

Flexibility 5.00 3.00 0.33 5.00 1.00 7.00

Reliability 0.25 0.17 0.11 0.33 0.14 1.00

 20
PAIRED COMPARISON JUDGEMENT
MATRIX
Vendor Factors

Reputation Technical Ability Service

Reputation 1 1/7 1/5

Technical Ability 7 1 3

Service 5 1/3 1
 21
EVALUATE THE ERP SYSTEM USING THE
AHP METHOD

First developed by R. W. Saaty, Analytical Hierarchy Process directs how to determine the priority of a set of
alternatives and the relative importance of attributes in a multiple criteria decision-making problem, and
has been widely discussed in various aspects.
Here, it involves three stages
Decomposition: AHP model is composed explicitly from the fundamental-objective hierarchy.
Comparative Judgement: Each decision maker utilizes paired comparisons for the attributes and
alternatives to extract judgment matrices with a nine-point scale at each level.
Synthesis of Priorities: The paired comparison process is repeated for each attribute in the alternative
prioritization problem based on the largest eigen-value method. Then, the relative importance of
attributes and the global priority of alternatives can be obtained by aggregating the weights over the
hierarchy.
AHP can thus accelerate the development of a consensus amongst multiple decision makers in ERP system
selection process.
In the upcoming slides, the three stages of the AHP process shall be demonstrated with respect to the
purchase of ERP system by Hsinchu science park, Taiwan.
 22
EVALUATE THE ERP SYSTEM USING THE AHP METHOD -
DECOMPOSITION & COMPARATIVE JUDGEMENT

Under the topic of Practical Example, slides 14-16 have already explained how the organization has reached
to the criteria to be used for AHP system. The criteria are Total Cost, Implementation, Functionality, User
Friendliness, Flexibility and Reliability for the software and Reputation, Technical Capabilities and Service
for the vendors.
Paired comparisons of the alternatives on each attribute and the inter-attribute relative importance were
made and converted to a numerical scale of 1–9.
The eigen vector of the inter-attribute importance matrix gave the relative weight of the attributes for
each decision maker.
Table 3 lists the inter-attribute paired comparison matrices of decision maker 1 for system software and
vendor attributes. The relative weights of each attribute for all decision makers are listed in Table 4.
According to Table 4, the decision makers were fairly consistent in ranking the attributes. The functionality
of the ERP system was ranked first among system factors, followed by system flexibility, implementation
time, total cost, user friendliness, and system reliability. As for vendor selection, all decision makers
agreed on technical ability, vendor service ability and reputation as the order.
 23
EVALUATE THE ERP SYSTEM USING THE AHP METHOD -
DECOMPOSITION & COMPARATIVE JUDGEMENT
 24
EVALUATE THE ERP SYSTEM USING THE AHP
METHOD - SYNTHESIS OF PRIORITIES

After this, the eigen vector for each attributional contribution is extracted and kept in a matrix, column wise. The dimension of
the matrix, here is 3X6 and 3X3, respectively.
Then the matrix is multiplied with the attribute weight column vector to get the final scores (in the form of column vector) for
each decision maker.
For each meta-parameter (viz System and Vendor), we get three such column vectors, for the three decision makers. Together,
they form Table 5 (for System only). The final consensus is arrived by taking the geometric mean of the three individual decisions.
Throughout the stages the consistency index was calculated and was ensured that it remained below 0.1.
We can see, in table 5, that two decision makers ranked System A as the best system. One decision maker had ranked it as the
second-best, but then his best system (System B) was not far way from it.
So the three decision makers amicably and objectively converged on purchasing system A for Hsinchu Science Park, Taiwan.
 25
CONCLUSION
ERP system integrates the flow of material, finance and information and supports organisational strategies
There is a necessity for an ERP selection framework to evaluate how best to implement ERP according to the
strategy of the company.
AHP Method: directs how to determine the priority of a set of alternatives and the relative importance of
attributes in a multiple criteria decision-making problem.
Step-wise procedure for selecting a suitable ERP System: collect information→identify
characteristics→construct structure of objectives→ extract attributes for evaluation→screen unqualified ERP
systems→ evaluate systems using AHP method.
Practical example: Electronics company in Taiwan.
Problems faced: existing ERP limited operating efficiency, duplication of effort, confused business
processes; dynamic business environment put pressure on the the company.
Framework applied to ERP System selection.
The precision with which decision makers could provide a paired comparison was limited by their knowledge,
experience, and even cognitive biases, as well as by the complexity of the ERP system selection problem.
Detailed review facilitates clarification of problems and improves decision quality and saves time.
Advantages of the framework: structure of objectives is consistent with organisational goals, complex process
can be decomposed into easier judgements, flexible, systematic, ensures costs are kept to a minimum.
GROUP 4