QUESTION

Management Information systems    

the course is Management Information systems

How would you advise Macharia to proceed on the issue of upgrading the B1 System? Should they upgrade to higher version of SAP or should they just improve the B1? What criteria would you use as a basis for your decision/recommendations?

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Note: Regarding the case assignment, please incorporate “1 or more” external sources for the question answered for full points.
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Emerald Emerging Markets Case Studies

Zaidi Oil: the SAP ERP dilemma

Freddie Racosas Acosta, Arlene Suson Acosta,

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Studies, Vol. 4 Issue: 8, pp.1-10, https://doi.org/10.1108/EEMCS-01-2014-0023

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Zaidi Oil: the SAP ERP dilemma

Freddie Racosas Acosta and Arlene Suson Acosta

Freddie Racosas Acosta

is a Senior Lecturer

based at Strathmore

University, Nairobi,

Kenya. Arlene Suson

Acosta is a Managing

Director based at FilCom

Traders and Consultants

Ltd., Nairobi, Kenya.

On a beautiful October morning in 2011, Mr Abbas and Ms Kariuki were seated facing each

other in the Zaidi Oil Group boardroom in the presence of the CEO and five other company

directors in Nairobi. They were debating whether or not to upgrade their current B1 system

to a bigger version of SAP.

Abbas was the new ICT Director of Zaidi Group, an oil marketing company (OMC)

operating in East Africa. The fact that he had been with the company barely three

months did not prevent Abbas from voicing his opinion and even disagreeing with the

directors around the table as they discussed the B1 system. Kariuki, the Finance

Director, saw the USD400,000 price tag for system licenses alone as very impractical.

However, unable to hedge quickly enough, the company had lost a substantial amount

of money due to the 20 per cent depreciation of the Kenyan shilling against the dollar

in just three months:

It’s time to upgrade it, said Abbas.

No, it’s not. Was the emphatic reply from Kariuki:

“Yes, it is! We have outgrown the system and it is risky to remain with B1”.

“No, it’s riskier to upgrade to A1 since it is too big for us, not to mention the other costs

involved. B1 software can be improved to accommodate our additional needs”:

But its architecture, not to mention its functionalities, is meant to serve the needs of small

companies (see Exhibit 1). We are no longer a small company, replied Abbas. It is not good

practice to keep on building and adding modules on top of B1 to meet our growing needs. It is

as folly as adding 10 more floors to a building whose architecture was meant for a one-storey

building.

“But other large entities are on B1 as it is more cost effective. And let me tell you why we

shouldn’t abandon B1 unless we absolutely have to”, Kariuki stated:

The success of the integration of the B1 with other modules from other vendors (approved by

SAP) is proven through success stories such as Kenya Paint Company which RedLock

implemented and supported. I’m also certain that Kenya Paint is not just relying on the standard

B1 but have integrations with other modules to enable them managed their operations better

(see Exhibit 2). The integration will only be done with other modules approved by SAP – i.e.

already proven – where’s the problem?

One problem is that Kenya Paint is operating in Kenya only with very few branches. Secondly,

SAP has no more responsibility on us if RedLock[1] do extensive customization of the system.

We are in the hands of RedLock, who in the past, did not deliver a customized system and failed

to provide support services, Abbas went on further.

Disclaimer. This case is written

solely for educational

purposes and is not intended

to represent successful or

unsuccessful managerial

decision-making. The author/s

may have disguised names;

financial and other

recognizable information to

protect confidentiality.

DOI 10.1108/EEMCS-01-2014-0023 VOL. 4 NO. 8 2014, pp. 1-18, © Emerald Group Publishing Limited, ISSN 2045-0621 EMERALD EMERGING MARKETS CASE STUDIES PAGE 1

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Granting we improve again on B1, for how long can we remain with it considering the growth we

set for ourselves in the next five years? Then where would we be? We’d be explaining to the

board why Zaidi Oil can’t open new subsidiary companies in Zambia, DRC, South Sudan,

Burundi, Djibouti, Malawi, Mozambique and Zimbabwe because our system can’t support it. I

don’t want that job! Do you?

“Of course not!” Kariuki was stern:

But we already have a system in place. From the meeting we had with RedLock, they have

assured us that all areas we require improved in the current system can be handled (see Exhibit

3) at a total cost of USA$125,000[2].

But all our competitors in the continent, like Kenol Kobil, Oryx Oil, Gapco, Gulf Energy, Hass

Petroleum, Petrocity, not to mention multinationals like Shell, Total and BP are among others

using SAP A1, Oracle or JD Edwards. None of our size is using B1. Are you not concerned?

“Of course, but what’s that have to [. . .]”:

Exactly! Abbas interrupted, That is because SAP has already customized a version of A1 that

is based on best practice in our industry for companies of our size. Why on earth would you want

to remain with B1?

Because, said Kariuki, we invested in B1 in 2007, reinvested again in 2010 when we

re-implemented the software which improved functionality to a different level. If there is a

chance that we can still get more out of the same system by adding a few modules and

developments and achieve the functionalities currently lacking, we should give it a try.

Otherwise we will not have given shareholders a chance to reap maximum returns on investment

made on B1.

But Kariuki, Mr Abdul, the Operations Director, interrupted, We in Operations are looking for a

more robust system that could monitor quality and quantity of our products both in our tanks and

in transit. Last year, we reported loss and theft of products worth 2 million shillings due to laxity

in our system’s controls even after we installed CCTV. Things will just get worse as we intensify

our campaign in pushing 200,000 cylinders of Zaidi LPG[3] in Kenya, Uganda, Tanzania and

Rwanda. Besides, Commercials said they will open an additional 50 service stations across East

Africa in the next five years. I am afraid B1 can’t provide the functionalities we need.

“There you go”, Abbas seconded:

But colleagues, this time of the year is difficult for us. I am sure, SAP B1 can still handle our

volume even if we grow in the next two years, Samson, the Commercial Director, interrupted.

“We can harmonize our processes before adding the additional modules”.

“And B1 can be improved with less cost”, Kariuki added definitively. “Why are we trying to

abandon it?”

“It is because cheap is expensive”, Abbas replied:

Four years ago, we spent USA$75,000 to implement SAP B1 and last year another USA$95,000

just to re-implement it. This time, USA$125,000![4] When will it end? he concluded.

Instead of replying, Kariuki sat back. The CEO, Mr Macharia, was listening to the debate.

It was not the first time he heard his executives disputing. This thorough approach,

however, had only deepened Mr Macharia’s confusion over what to do about B1. He

wondered what approach would be most in keeping with how Zaidi Oil implemented and

exploited its overall core system.

Oil product consumption in Kenya by product

In Kenya, oil products were mainly consumed in the manufacturing, commercial, transport,

residential, power generation and agricultural sectors. Consumption of oil products has

PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014

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been erratic over the years and it is important to note that the demand for oil products had

on average been increasing over the years. The national consumption trends of selected oil

products increased by an estimated 8 per cent from 2.62 million m3 in 2005 to about 2.84

million m3 in 2006, with a further increase of 5 per cent in the year 2007. A sharp drop by

3 per cent in the yearly national consumption was recorded in 2008 due to the activities of

the post-election violence (Table I).

History and company highlights

Zaidi Oil Group of Companies Ltd. was founded in Kenya in 1990 by Mr Macharia and three

other East African businessmen and started out as an oil distributor to Rwanda and

Democratic Republic of Congo markets as local OMCs saw opportunities with the

departure of some of the major multinational players from Kenya. Over the years since its

inception, Zaidi has grown and acquired oil depots in different parts of Kenya and opened

subsidiary companies in Uganda, Rwanda and Tanzania.

In 2007, Zaidi Oil Kenya acquired the Mombasa Terminal and formed Zaidi Transport Ltd.

to improve efficiency in transporting its products across the region. The fleet started with 30

trucks. By mid-2010, it had grown to 60 trucks as the demand for oil products doubled.

Zaidi Oil’s businesses were primarily focused on supplying oil products in the power

generation, mining, manufacturing and construction sectors.

The following were some of the highlights in 2011[5]:

_ Lubricants were introduced in the first quarter.

_ Zaidi Cylinders was introduced in Mombasa City in the second quarter.

_ Hospitality volume in Zaidi Mombasa Depot was 180,000 m3 of fuel and 4,800 tons of

LPG. This earned a net revenue of USD180,000.

_ Established an efficient supply chain management monitoring system – seven days a

week stock cover – by February. However, it was established in the books only and not

in actual product.

_ Implemented the ISO 9000:2008 quality management system in the first quarter.

_ Completed the Spur line[6] in February 2011 at a cost of USD950,000.

_ Completed and operationalized the Nairobi Terminal in April 2011 at a cost of USD1.7

million after a year of delays.

_ Completed the metering and tank gauging facility in Mombasa by March at a cost of

USD200,000.

_ Completed a security enhancement project (CCTV) in Mombasa by March at a cost of

USD100,000.

_ Completed a Mombasa truck fuelling facility by the first quarter.

_ By the third quarter, the Group’s total number of employees was 450.

Table I KPC uplifts vs. national consumption in Kenya

Year KPC uplifts

National

consumption

Yearly increase in national

consumption in %

KPC uplifts vs national

consumption in %

2005 2,350,577 2,624,870 – 90

2006 2,487,883 2,836,796 8 88

2007 2,721,796 2,984,647 5 91

2008 2,573,888 2,906,833 _3 89

2009 3,079,695 3,471,845 19 89

Source: Republic of Kenya Economic Survey 2010 as computed by KIPPRA as cited by Silvestre

Kasuku

VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3

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Recent business statistics showed the Group supplied over 300 million liters of oil to retail,

resellers and commercials in the region. This was against a capacity to supply 600 million

liters to the same market.

It needs assessment

Abbas[7] joined Zaidi Oil after a five-year stint in South Africa. His mandate was to set up

the structure for the newest department in the company, a breakaway from the Finance

Department with only five members of staff, himself included. Unlike the former Information

Technology (IT) Manager, he reported to the CEO and one month after joining the

company, Abbas initiated an IT needs assessment survey across the Group and all

departments to better understand ITs current status within the company. He also visited

facilities in Mombasa, Nairobi, Nakuru, Kisumu and Eldoret and subsidiary companies in

Uganda, Rwanda and Tanzania, including Zaidi Transport.

The company’s ICT infrastructure was highly decentralized and its ICT governance and

purchasing procedures had never been completely coordinated. While they all had the

same core B1 system, databases and hardware, most had dissimilar hardware and

software platforms. In addition, even if two operating companies did have the same

application, they were configured differently and loaded with different information. In fact,

even if they dealt with the same customer, there was no guarantee that they would have

exactly the same customer information within their separate information systems.

Abbas also discovered important issues, challenges and limitations of their current ERP

system, including the unreliability of their only server in Kenya and obsolete network and

Internet infrastructure. He also noted reports of frequent system downtimes that paralyzed

operations, resulting in inefficiencies, including the inability to load and transport products

due to necessary Kenya Revenue Authority documentation. The Zaidi Oil IT users, however,

were largely young and highly computer literate. See Exhibits 2 and 3 for B1 limitations and

add-ons required.

Abbas proceeded to formulate his IS Plan[8], which he divided into three stages to support

Zaidi’s five-year strategic plan of becoming a premiere energy company in Africa by 2015

and hoped to enter the power generation and oil exploration business by 2020.

Stage 1: Enhance existing “Foundation” solutions

_ Replace B1:

– financials, purchasing and sales; and

– stock management (inventory), crystal reporting and fixed asset tracking.

_ Solutions required soon:

– human resource management, business process and work flow;

– company-internal: instant messenger (desktop and mobile);

– business intelligence to centralize view of company performance; and

– customer relationship management (crm) or @customer/stakeholder/channel

relationship management and basic campaign management, systems portal and

mobility.

_ Payroll (enhance/incorporate into new ERP). Local solution is currently in used.

_ Areas of possible “Paper overload” _ focal point for digitization, Work Flow, Electronic

Data Interchange (EDI) for the centralization of procurement processes.

Timeline: January-December 2012 (12-month duration).

PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014

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Stage 2: Core business solutions rollout (Forecourt and related “New force in energy”

strategy)

_ Intelligent Forecasting: inventory, ordering and sales;

_ Inventory tracking and control;

_ Forecourt management systems, e.g. e-signage, remote price management;

_ CRM (Part 2):

– market and consumption analysis and geo-demographics; and

– market-specific campaigns (multi-channel) and contact centre.

_ Loyalty program;

_ Payments, e.g. mCommerce and Card/Smartcard linked to recharge gateway;

_ Smart utility usage for sites;

_ Franchise management solutions, e.g. standards, safety, skills and processes; and

_ Estate management and asset management.

Timeline: January-December 2013 (12-month duration)

Stage 3: advanced solutions

_ Integrated marketing tools (forecourt and channels), e.g. centralized national pricing tools;

_ Number plate recognition solutions;

_ Advanced payments (RFID/NFC);

_ Detailed service bookings (car maintenance);

_ Enhanced loyalty;

_ Advanced fleet management, e.g. driver monitoring, load quality monitoring and load

temperature monitoring; and

_ EDI for seamless procurement and logistics.

Timeline: January-June 2014 (6-month duration)

Abbas also outlined his IT Development Plan for 2011-2012:

_ Implement high performance computing:

– procure modern high-end server(s); and

– create virtual servers for the various systems and applications in use.

_ Implement enterprise IT services:

– setup Zaidi domain and exchange; and

– operationalize multiprotocol label switching in all operational business units;

– have all the business units on fiber optic cables;

– create shared folders for the individual departments; and

– have centralized mail backups, software and antivirus updates.

_ Restructure the IT Department:

– retain the IT Manager (to manage current ICT infrastructure);

– hire a technological innovation manager (to spearhead identification and

implementation of breakthrough systems that could possibly change industry

economics); and

VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5

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– create a position of IT Officer in each country.

Conclusion

Abbas and Kariuki did not reach a consensus about Zaidi’s ERP system that morning in

October 2011 and this left Mr Macharia wondering: Would upgrading to a higher version

create a bigger risk than remaining with the lower version? Kariuki was fearful of

overspending on a huge IT system where current functionalities required could be

addressed by a smaller system through add-ons, customization and development. She

was aware that USD100,000 would be budgeted for the upgrade of their server and

network infrastructure if they would remain with and improve B1.

Abbas, on the other hand, was worried that Zaidi was building an ever-growing company

on a small ERP system. Abbas’ fears also included RedLock’s past inefficiencies: What if

RedLock made mistakes with the customization process and turned the B1 system from an

application that was stable into a real problem for the IT department and the Group? The

partner at RedLock had explained that the reason they did not implement the system

thoroughly in 2010 was because they too were growing, resulting in some internal

inefficiencies, not to mention working with the existing limitations of SAP B1 version at that

time. It was also explained that RedLock had now sorted out its internal problems and

assured that all the needs of Zaidi could now be addressed with the latest version of SAP

B1 system (Version 8.8). But Abbas had gotten nowhere by having RedLock sign an

service level agreement stating that, in case of loss or corruption of Zaidi’s data in the

process of development, RedLock would assume full responsibility.

Did all of this mean that it was now time to upgrade to a bigger version of SAP? A typical

full-scale SAP A1 installation would require five high-performance servers and several

individual workstations connected to these servers in a virtual private network setup via

either local area network and/or wide area network connectivity (roughly USD200,000), not

to mention other costs of ownership such as implementation and training costs

(USD400,000)[9]. What if the cost of shifting to SAP A1 were to run over budget? What

would happen to a company that was already experiencing some financial difficulties

(Exhibit 5)?

Mr Macharia saw that a move to change Zaidi Oil’s SAP system entailed a number of

follow-up decisions. Was now the right time to make them, or should the company simply

improve the current one?

The other directors, none of whom were specialists in IT, were wondering what, if anything,

they could contribute to the discussion and/or to the final decision.

Notes

1. RedLock is a Gold Partner of SAP for the BI System.
2. USD1 _ KES105.00
3. LPG business is one of the fastest growing OMC businesses. Zaidi currently has the second

largest facility in Kenya plus a market share of 25% in the region.

4. USD125,000 includes licenses, development, implementation and training costs.
5. Source: Authors.
6. The Spur line was built to solve the issue of the storage capacity limit given to each OMC at the

refinery. It is a direct line between Zaidi Mombasa Terminal and KPRL.

7. Abbas completed a Bachelor of Science degree in Computer Science (2005) and a Master in

Business Administration (2010).

8. Source: Authors.
9. SAP A1 will be implemented by a SAP Gold Partner from Zimbabwe that had partnered with a local

technology company. They specialized in the Oil and Gas sector.

Keywords:

Oil and Gas,

Energy Sector,

ERP,

SAP,

Kenya

PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014

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10. SAP Business One was not an original product of SAP. It was acquired from another company to

diversify its product portfolio catering the ERP needs of small companies.

11. Negative inventory occurs when Zaidi’s stock is nil and/or below the required volume by a

customer in one depot while stocks owned by other marketers are in their tank because of the

hospitality service.

Exhibit 1

SAP Business One solution (www.sap.com/sme/solutions/businessmanagement/business

one/index.epx, accessed 24 November 2011)

The SAP Business One (B1) was a single integrated management application for small

businesses. The application integrated all core business functions across the entire

company – including financials, sales, customer relationship management, inventory and

operations. SAP Business One was a single application, eliminating the need for separate

installations and complex integration of multiple modules.

SAP Business One[10] software included the following:

_ Financial management: Automate, integrate and manage all financial and accounting

processes.

_ Warehouse and production management: Manage inventory across multiple

warehouses, track stock movements and manage production orders based on material

requirements planning.

_ Customer relationship management: Grow customer profitability and increase

customer satisfaction with effective sales and opportunity management and after-sales

support.

_ Purchasing: Automate entire procurement process from purchase order to vendor

invoice payment.

_ Reporting: Act on instant and complete information with comprehensive, real-time

reports.

Enhancements can be done by integrating modules developed by independent companies

approved by SAP. Any especial customized needs by other companies can be achieved

through its system development kit.

VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7

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Exhibit 2

Exhibit 3

Table EI Additional modules/add

Need/Functionality Brief description

Human Resource and

Payroll

Includes recruitment, administration of personnel benefits and

compensation, personnel development, travel management,

training and events management, time management, workflow,

payroll and employee self-service

RedLock Response: Integrate Altura, Pledge

Business Intelligence Offers best practice reports, analytics, simulations and data

warehousing tools for financial accounting, logistics, customer

relationship management and many more

RedLock Response: Business Objects will be used to fulfill this

requirement

Project Management Co-ordinates and controls all the phases of a project; involves

managing projects and sub-projects including budgeting,

execution, management, costing and simulations

RedLock Response: Enterprise Project Management module will

be added to Business One

Treasury Management Includes cash and liquidity management, loans management,

bank accounting, bank communication management, SWIFT

integration, treasury and risk management

RedLock Response: Development will be done to achieve this

requirement

Plant Maintenance Manages equipment and technical objects, maintenance and

service

RedLock Response: Variatech maintenance add-on will be used

Quality Management Includes planning, inspections, notifications, control, certificates

and test equipment management

RedLock Response: A combination of Variatech and Usability

Pack will be used

Table EII SAP B1 system limitations and RedLock response

1 Posting in closed periods for certain transactions, e.g. sales documents but not expenses

RedLock Response: Usability Pack data management and validations to be used

2 See who posted a document without actually having the rights to raise the document

RedLock Response: SAP Business One query can be written

3 An approver of a document should not be able to raise the same transactions

RedLock Response: Usability Pack data management and validations to be used

4 Negative inventory[11]

RedLock Response: Development will be done to streamline and correct the process

5 Financial report consolidation for the various countries

RedLock Response: Business Objects will be used to fulfill this requirement

6 Credit limits in system according to customer currency

RedLock Response: Business Objects will be used to fulfill this requirement

7 Bank statements can be processed by the system

RedLock Response: Templates for the import tool will need to be created per bank, once

this is done standard functionality can be used

8 Automated purchase requisitioning system

RedLock Response: Development will be done to achieve exact process match

9 Budget monitoring

RedLock Response: Usability Pack notifications will be used

10 Workflow systems

RedLock Response: Usability Pack workflow will be used

Source: Authors

PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014

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Exhibit 4

Exhibit 5

About the authors

Freddie Racosas Acosta is a Senior Lecturer of Information and Technology Management

at Strathmore Business School. His area of research pivots around the interplay of strategic

management and information systems, as well as on the role of new information and

Table EIII Projected cash flow for the SAP A1 project

The cost of capital is 12%

Year Cashflow (USD)

Year 0 _1,000,000

Year 1 350,000

Year 2 350,000

Year 3 400,000

Year 4 400,000

Year 5 500,000

Source: Authors

Table EIV Statement of financial position (Balance Sheet)

Balance sheet

as at January 31, 2011

Actual

Kshs

Assets

11,000,000–Non-Current Assets

11,100,000–Property, Plant and Equipment 110,406,455.00

11,200,000–Intangible Assets 33,501,750.00

Total 11,000,000–Non-Current Assets 143,908,205.00

12,000,000–Current Assets

12,100,000–Inventory 110,229,777.00

12,200,000–Trade Receivables 83,010,993.00

12,300,000–Other Receivables 99,627,775.00

12,400,000–Tax Recoverable 13,065,900.00

12,500,000–Intercompany 75,604,245.00

12,600,000–Cash and Cash Equivalents 68,102,556.00

Total 12,000,000–Current Assets 449,641,246.00

Total Assets 593,549,451.00

Liabilities

21,000,000–Current Liabilities

21,100,000–Trade Payables 395,660,129.00

21,200,000–Other Payables and Accruals 32,549,202.00

21,300,000–Taxes Payable –

Total 21,000,000–Current Liabilities 428,209,331.00

Non–Current Liabilities

Loan for Nairobi Terminal 142,800,000.00

Capital and Reserves

31,000,000–Capital and Reserves

31,100,000–Capital 10,000,000.00

31,200,000–Reserves (190,350,106.00)

Profit Period 202,890,226.00

Total Capital and Reserves 165,167,430.00

593,549,451.00

Source: Authors

VOL. 4 NO. 8 2014 EMERALD EMERGING MARKETS CASE STUDIES PAGE 9

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communication technologies for organizational learning, knowledge management,

transformation and innovation. He has studied problems of technology adoption and

information security implementation in great depth. Freddie Acosta can be contacted at:

[email protected]

Arlene Suson Acosta is the Managing Director of Filcom Traders and Consultants Ltd that

is based in Nairobi, Kenya. She has a PhD in Development Education with special interest

in participant-centered learning, constructivist teaching models and educational

management. She is a Strathmore Business School-trained case methodology teacher and

case writer. She previously worked at Strathmore University as a Program Manager.

PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES VOL. 4 NO. 8 2014

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