“It’s true that 9 out of 10 ERP implementations in India failed.”

- Girish Menon, Vice-President, Global Marketing and Planning, Ramco Systems, in October 2001.

In November 2001, Bharat Petroleum Corporation Limited (BPCL), a leading player in the Indian petroleum industry, successfully implemented an Enterprise Resource Planning (ERP). Implementation began in April 2000 after the company decided to integrate all its activities through the ERP package SAP R/31.

The company hoped to speed up its decision-making and respond faster to customer needs through ERP. The intention was to show the differentiation in service, retain customers and help increase the business of its Industrial & Commercial (I&C) customers2. BPCL also wanted to increase its retail thrust by exploiting IT initiatives to the maximum.

The noteworthy aspect was that the company was one of the very few Indian companies to have successfully implemented ERP. With the successful implementation, BPCL customers could access information and do business online, which enabled BPCL to increase its share of I&C customers from 14.9% in 2000 to 15.8% in 2001. After the ERP implementation, BPCL’s revenues grew by 2.28% in 2000-01, even as the revenues of the petroleum industry declined by 3.4%.

BPCL

In 1951, the Government of India entered into an agreement with UK-based Burmah Oil Company and Shell Petroleum Co. (Burmah-Shell) for establishing an oil refinery in Bombay. In 1952, this agreement led to the incorporation of Burmah Shell Oil Refineries Ltd. In January 1955, the refinery at Bombay went on stream, and in 1962, the refinery started processing crude oil from Ankleshwar in Gujarat.

In December 1975, following the passing of ‘The Burmah-Shell (Acquisition of Undertaking in India) Bill,’ the Government of India signed an agreement with Burmah-Shell. Subsequently, the government took over the operations of the company and changed its name to Bharat Refineries. Initially, the company sold only kerosene, but later it set up service stations to sell petrol as well. Bharat Refineries became the first Indian company to introduce LPG for domestic cooking purposes. In January 1976, the government acquired 100% shares in the company, and in August, 1977, the company’s name was changed to Bharat Petroleum Corporation Ltd. (BPCL).

The economic reforms of 1991 paved the way for major changes in BPCL. The company entered into marketing contracts with Indo-Burmah Petroleum (IBP), Madras Refineries Ltd. (MRL) and Cochin Refineries Ltd. (CRL). In 1992, the government disinvested 30% of its stake in BPCL in favor of financial institutions and mutual funds. The Rs3 10 share created a record on the bourses when it opened at Rs 1,275, the highest ever opening among public sector companies. In 1993, BPCL tied up with its erstwhile partner Shell, to form Bharat Shell Ltd. (BSL), in which the latter had a 51% stake. In 1994, BSL launched lubricants under the Shell brand. These were marketed by BPCL as well as by BSL. By the late 1990s, BPCL had emerged as India’s second largest oil company in terms of marketshare. In April 1994, 3.8% of BPCL’s equity was disinvested in favor of its employees.

In 1998-99, the government decided to further disinvest 26% of its stake in BPCL, which was one of the ‘Navratnas’.4 This move gave BPCL greater freedom to develop employee policies. It also enabled the company to take decisions regarding capital project expenditures without government interference. In 1999, BPCL acquired 32% stake in Indo British Petroleum (IBP).

BPCL’s Mumbai refinery consistently operated at over 120% of its 6.9 million metric tonnes per annum (mtpa) installed capacity. It had the ability to process a wide variety of crude, and its proximity to the Bombay High oil field enabled it to meet most of its crude demand domestically (only 15% was imported). To make up for its limited refining capacity, BPCL formed a strategic alliance with Chennai Petroleum Corp (which was later taken over by IOC) to sell the products produced in the latter’s 6.5 m mtpa Manali refinery. The government also transferred its entire shareholding in Kochi Refineries (KRL) (capacity 7.5 mtpa) to BPCL. BPCL also acquired IBP’s 19% stake in Numaligarh Refineries (NRL) (capacity 3 mtpa) in West Bengal. These acquisitions, and the 9 mtpa refinery being set up at Bina in Madhya Pradesh, were expected to address the limited refining capacity problem in the future.

By mid-2001, BPCL’s nationwide retail network comprised 4,500 outlets, 60% of which were company-owned or leased – the highest percentage among oil PSUs. Retail sales accounted for around 60% of the company’s sales volume, with average sales per outlet being 223 kl per month. In 1999-00, BPCL’s marketshare was 32% in petrol and 27% in diesel. The company was particularly strong in the west and south. However, its share in lubricants, the most profitable product, was relatively low, partly because of its dependence on other oil companies for the base oil needed to make lubricants.

BPCL planned to increased its emphasis on retail business and increase its non-fuel revenues, by leveraging on the strength of its retail network by providing value-added services like convenience stores, automated teller machines (ATMs) and internet kiosks. The company realized the importance of IT initiatives to retain its market position in the post-APM era.5 BPCL began to implement its IT initiatives in 1996. As part of the organizational restructuring exercise, the company was revamped into six Strategic Business Units (SBUs) – Retail, Aviation, Lubricants, Liquefied Petroleum Gas (LPG), Industrial & Commercial (I&C), and Refinery. These SBUs were integrated with support entities like Information Systems, Finance, Human Resources, Strategy and Brand Management. This restructuring was designed to help the organization focus on specific customer segments and address their individual needs. The company also realized that it needed to streamline its processes and integrate the organization as a whole. It is when the company decided to implement ERP.

ERP

ERP is software driven business management system that helps to integrate all functions of a business including planning, manufacturing, sales, and marketing. The history of ERP has its roots in the inventory control systems developed in the 1960s to manage inventory according to traditional inventory concepts. Over the next few decades, as businesses became increasingly complex and global, companies came under pressure to improve their competitiveness by lowering operating costs and improving logistics. ERP aimed at helping the management for setting better business practices and equipping them with correct information for taking timely decisions.
In the 1970s, the concept of Material Requirement Planning (MRP) emerged, which focussed mainly on raw material requirement planning. In the 1980s, the concept of MRP-II (Manufacturing Resource Planning) evolved. MRP-II involved optimizing the production process of the entire plant. Though MRP-II evolved as an extension of MRP for shop floor and distribution management activities, it was gradually extended to areas like Finance, HR, Engineering and Project Management etc. This eventually gave way to ERP that covered cross-functional coordination and integration to support the production process.

ERP initially targeted the manufacturing industry and dealt with functions such as planning and managing businesses like sales management, production management, accounting and finance. Later, these packages diversified into many different types of industries. The main modules in a typical ERP application were finance and accounting, customer order management, MRP, materials management and decision support/data warehousing.

In the pre-ERP era, companies were largely confined to local markets and all managerial functions were managed by a single set of people. However, as businesses became global companies’ activities grew beyond local boundaries and more people were brought in to manage the businesses. While the departments within the companies grew, they also set up their own procedures and hierarchy. Within departments, information moved upward. Due to the upward movement of information, it was shared between departments at the top level only. ERP thus aided in effectively managing the resources of the organization.

The ERP market was widely spread with the top 10 players accounting for almost 48% of the total market, the rest of the market was occupied by small and regional players. The ERP market witnessed substantial growth during 1998-2000 worldwide, driven mainly by the Y2K issue6. ERP companies like SAP, PeopleSoft, Oracle, JD Edward and Baan recorded a steady growth in their revenues. However, after 2000, there was a slowdown in the ERP market. By 2001 the global ERP market was valued at $ 23 billion. SAP was the market leader with a 20% market share, followed by Oracle with 7.5% marketshare.

In India, the need for ERP implementation was felt soon after the liberalization of the economy in the early 1990s. Indian companies realized the importance of customer focus, improving speed of delivery and cost competitiveness to compete with MNCs. It became increasingly important to provide improved quality at lower prices. The decision to implement ERP systems for improving business processes and gain the competitive edge in the new global environment thus had become essential. Manufacturing firms were the earliest to implement ERP, followed by FMCG, automotive, steel, oil, textile and pharma companies. The most popular modules were Finance and Accounting, Sales and Distribution, Material Management/Purchase and HR. Companies such as TISCO, TELCO, Nestle, Reliance, Godrej, Larsen & Toubro, HLL, Maruti, BPCL, IOCL, ONGC, Coke, Pepsi, ITC, Colgate-Palmolive, P&G, Shopper’s Stop and M&M were some of the major companies that decided to implement ERP. The ERP market grew substantially with a CAGR of 70% during the late 1990s (Refer Table I), because of the large extent by a large number of medium and small scale enterprises adopting ERP.

Table I
The Indian ERP Market

(in Rs million)

* estimates

Source: Express Computer India, October 2001.

However, a majority of ERP implementation exercises in India proved to be failures. There were reports of small scale companies even being driven to bankruptcy. Analysts attributed the failure to poor understanding, planning and implementation of the system, and not to the inherent problem in the software. A research analyst at Frost & Sullivan said, “Most CIOs we spoke to said that ERP packages cost the earth, take ages to implement and at the end of the day deliver nothing.” According to a Gartner study7 in 2001, it was found that the average cost overrun in Indian ERP implementations was 178%, the average implementation time overrun was 230% of original expectations and the average decline in productivity was 59%.

BPCL’s successfull implementation of ERP thus came as a major relief to ERP vendors and industry watchers. However, analysts commented that BPCL had not implemented ERP as a stand- alone system, but had integrated with the overall IT initiatives, which it had initiated in 1996 after the restructuring.

BPCL divided its IT initiatives into a three-pronged strategy, wherein it planned to create a communication network within the organization; to create a basic information network for the entire corporation and to process transactions with customers all over the country. The strategy was devised after the company divided the organization into six SBUs and conducted a detailed evaluation of the company as a whole. The organization was restructured to help focus on specific customer segments and address their individual needs. For this, BPCL needed a system for speedy and effective communication. The company’s senior management realized that unless the procedures were streamlined and communication improved, faster decision-making would be very difficult. The communication structure was seen as hampering the integration of its activities. The problem areas included high costs of traditional communications, quick access to executives, and the need to communicate with recipients over multiple locations. 

To improve communication systems within the organization, BPCL decided to establish an intranet. The company chose Microsoft Exchange Server as the platform, because of the level of integration with the desktop environment and MS Windows NT Server.

BPCL conducted feasibility testing of the solution with the help of a pilot implementation. With the help of Windows NT Server and Exchange Server, BPCL connected three locations on a Very Small Aperture Terminal (VSAT)-based network with a bandwidth of 64 kilobytes per second (Kbps) to share Time Division Multiplexing/Time Division Multiple Access (TDM/TDMA) connections. The VSAT network was rated on the criteria of ease of deployment, speed of mail delivery, zero message loss and response times. For a comprehensive implementation of the intranet, BPCL took help from Microsoft Consulting Services.

BPCL connected its corporate office in Mumbai with the various regional offices. Seven web servers were deployed at the VSAT hub in Bangalore to provided intranet connectivity to users all over the country. Access was provided with the latest local and international developments through the intranet. This not only helped the company offer better services, but also aided in building employee skills and competencies. Internet gateways12 were made available at the refinery as well as at all the regional offices. All the employees were thus constantly connected to each other and to the outside world.

BPCL also implemented various applications to facilitate information retrieval from corporate databases, including intranet applications that allowed employees to access and update personnel records such as contact details and salary information on the intranet itself. It also introduced ‘Query by Mail’ (QBM) by way of which remote users could extract business transactions from corporate databases. This system helped conserve the WAN bandwidth and schedule database queries at night. Communication costs reduced drastically because of the communication infrastructure. According to reports, in 1999, savings on long-distance landline communications were less by 30% as compared to costs in 1998.

The ERP implementation was part of the company’s ‘Project CUSEC (Customer Service and Satisfaction), which had to meet the challenge of an imbalance between refining and marketing. The company selected SAP R/3 as it was already being successfully used by major oil companies in the world. It was also the only package which had an oil industry specific package and an India specific package.

BPCL appointed consultants Coopers and Lybrand for the planning process of SAP R/3's implementation. The consultants worked in close co-ordination with functional experts within the company. The first phase of the implementation began in April 2000. The company’s existing network was redesigned and restructured and all its branches were linked to a central connectivity cloud. This was done through routers and switches,16 which were in turn connected to servers and workstations (Refer Table II).

Table II
System Components used by BPCL

* Juhu is connected to ISDN cloud.

Source: IBS Center for Management Research

BPCL realized that security would determine success of online business. BPCL ensured security through Sun Ultra 5 firewalls17, Real Secure, Internet Scanner, Floodgate, Web Trend and Web Sense. Web servers were installed at Bangalore and other metros with Compaq Proliant 1600 servers. Tests to modify and customize the SAP modules were carried on the quality assurance server (QAS). New developments and customization were made on the Development Server and then moved to the QAS for quality tests. (Refer Table III).

Table III
The Server Architecture

Source: IBS Center for Management Research

The server architecture included a Compaq Proliant NT server, an SCO box, a Sun Firewall and other servers. The Cisco 2610 routers at each location led to a Cisco 1900 family switch for distribution. BPCL had also setup a data warehouse with business objects and query-by- mail. The company also implemented a Tivoli ESM (Enterprise System Management) solution. By November 2001, BPCL became the first Indian company in the oil industry to have implemented ERP. According to analysts, BPCL managed to complete the ERP implementation much ahead of its arch rivals IOC and HPCL, mainly because of its efforts to streamline its IT initiatives.

1. Explain the reasons behind BPCL’s decision to implement the SAP R/3 ERP solution against the backdrop of the company’s IT initiatives that began in 1996.

2. Examine the ERP implementation exercise at BPCL and comment on the infrastructure utilized for the same. Also analyze the benefits reaped by the company as a result of the exercise.

3. Analyze the pre-requisites for a successful ERP implementation? Also comment on the future of the ERP market in India, keeping in mind the global slowdown in the IT industry in 2001.

Exhibit I
Sap R/3's Application Modules*

* The list is not exhaustive

Source: IBS Center for Management Research

Exhibit II
The Indian ERP Story

Source: IBS Center for Management Research

Exhibit III
Ratio of SMEs to Large Organizations Adopting ERP

Source: IDC (India) Limited, 2000.

Exhibit IV
Comparison between ERP & ERP II

Source: Businessworld, November 5, 2001.