ERP and the Future of the Supply Chain

Stephen DeAngelis

January 26, 2011

Supply chain analyst Lora Cecere reports that around 2003 a vision emerged “of an integrated end-to-end supply chain brought to life through extended ERP platforms.” She goes on to report, “It has failed.” [“Reflections: The End of a Decade in Supply Chain Management,” Supply Chain Shaman, 7 July 2010]. She doesn’t, however, blame Enterprise Resource Planning software for companies failing to achieve the vision of an integrated end-to-end supply chain. She notes that the handful of companies that have achieved the vision (or at least come close) use “ERP for transactional systems; but ERP is not the extended backbone to enable the end-to-end supply chain.” Before examining Cecere’s explanation of why she believes most companies have failed to implement an integrated end-to-end supply chain, I’d like to talk about some of the challenges that other analysts associated with ERP have identified. Perhaps the greatest challenge for most companies is cost.

 

In a post on that subject, John Westerveld notes that “the high cost of ERP support and maintenance” has resulted in several companies opting out of renewing support or upgrading their ERP platforms [“Perpetual ERP software – a broken model?,” The 21st Century Supply Chain, 2 December 2010]. He continues:

“A quick search on Google brings a wealth of articles talking about the cost of ERP ownership. … These give you a good idea as to the state of affairs with ERP support and maintenance. An article by Thomas Wailgum at CIO.com brought this issue into focus. In this article Wailgum discusses a concept from a Gartner report called ‘Global IT Debt’. As Gartner defines it, global IT Debt is ‘the cost of clearing the backlog of maintenance that would be required to bring the corporate applications portfolio to a fully supported current release state.’ According to Gartner, the Global IT Debt will total 500 billion in 2010 and has the potential to jump to 1 Trillion by 2015. The Gartner announcement points out that the most worrisome issue is that many IT organizations don’t have an application inventory or a structured application review process which means that IT management isn’t aware of the extent of the problem.”

Westerveld isn’t arguing that software upgrades and support aren’t important. After all, he writes, “Working for a software company [Kinaxis], I understand the importance of support and maintenance payments. This money goes to staffing support call centers, tracking down and fixing bugs and to funding research and development into new capabilities that will ultimately provide additional value to customers.” He continues:

“In our case, however, we provide an on-demand service that includes support and maintenance in the monthly payment. Of course as a subscription service you incur little upfront costs so the monthly payment seems far more reasonable. The old ERP model of perpetual, on-premises licensing adds insult to injury by demanding a staggering up-front price and ‘extortion like’ annual support and maintenance costs. At some point (and it’s starting to happen), companies are going to say enough is enough and start to look for alternatives.”

One of those alternatives, Westerveld notes is “software as a service (SaaS, or on-demand) model.” He claims that model is gaining momentum and that his company’s clients seem pleased with it. He concludes:

“When we first introduced our on-demand offering in early 2006, customers would often express great concern over data security and system availability. Today, after years of proven performance and security both with our software and with other SaaS companies like Taleo and Salesforce, most prospects don’t even ask about on-premise models. Will Big ERP go on-demand? They say they are, but a quick look at what they are offering, it appears to be more of an outsourced model than on-demand. Some companies like NetSuite are delivering ERP for small/medium businesses via SaaS. My thinking is that companies like this will expand upwards and will start taking some of the large accounts away from SAP and Oracle. Time will tell.”

In addition to moving toward a SaaS model, many corporate executives believe that ERP and social media functions are headed for a shotgun wedding [“Value of ERP Systems Could Be Enhanced by Embedding Social Media Functions, Study Finds,” IFS, 2 December 2010] The article explains:

“A study of more than 260 manufacturing executives released by IFS North America indicates that social media will affect enterprise software used by mid- to large-sized manufacturers and industrial companies. Interest in what IFS is calling Enterprise 2.0, which marries enterprise resources planning with social media functionality is real, the company says. However, study data suggest that integration of ERP with existing social media tools available online is of limited value. Instead, executives saw more value in ERP that mirrored the functionality of social media sites like Twitter and Facebook in order to streamline internal communication. … The study of manufacturing executives with mid- to large-sized companies was conducted for IFS North America by Boston-based Affinity Research Group. … The adoption of social media functions to include collaborative and communication capabilities is viewed with importance, but is not seen as a major influencer. There are two primary benefits of social functionality embedded in ERP: first, to streamline and communicate within the enterprise and, second, to document business processes to support lean initiatives.”

Although social media functionality embedded in ERP systems would improve internal communications, it doesn’t move companies any further towards the kind of integrated end-to-end supply chains that have been implemented by companies like Cisco Systems, IBM, Intel, Nokia, and Wal-Mart. In another post, Cecere writes:

“If you ask nine out ten consultants how to implement an integrated end-to-end supply chain project? The response is start with Enterprise Resource Planning (ERP) as the first step. The beauty of ERP is that it is a pre-packaged, proven solution that improves transactional efficiency. It is effective in automating order-to-cash, procure to pay, and a common code of accounts. No one questions that it has improved enterprise efficiency; however, the most efficient supply chain is not the most effective.” [“Dancing with a White Elephant,” Supply Chain Shaman, 25 April 2010]

She goes on to note that “supply chain transactional efficiency is a requirement for supply chain excellence, but the conventional hub and spoke ERP architecture with a tightly integrated SCP [Supply Chain Planning] module cannot deliver an integrated end-to-end supply chain.” Cecere makes basically the same five points in both of her posts about ERP and integrated end-to-end supply chains. In her latest post on the subject, she writes:

“Consider these five points:

  • The extended supply chain cannot be designed from the inside-out: The true design of the end to end supply chain must start from the outside-in. It needs to start with the customer’s customer with a laser focus on principle-based outcomes. ERP is designed from the outside-in. The investment in ERP platforms has improved enterprise efficiency; and is a piece of the equation, but is not the connector for the extended supply chain.
  • There was no ‘R’ in CRM or SRM: Unfortunately, there was no there there. What? There was no R– or relationship management– in the definition of CRM or SRM. CRM missed the mark more than SRM on the definition and reinforcement of value in extended relationships. We are just now seeing industry-specific technologies like ModelN for pharma, E2Open for high tech, DemandTec and Terra Technology for Consumer Products start to cross the gap of sensing what is happening in customer’s supply chains. Or the use of unstructured … technologies for supplier risk management like that in the Open Ratings’ functionality now embedded in D&B software to sense supplier failure. While companies bought into the vision that ERP vendors would build or partner to fill in the white spaces of required functionality, neither strategy has worked. Five years later, the white spaces still remain.
  • The extended supply chain is about much more than transactions: ERP improves the efficiency of transactions, but the extended supply chain requires much more. It requires demand sensing and translation capabilities, performance and risk management monitoring and assessments, and near-zero latency information flows.
  • We must sense before we respond: Effective extended supply chain architectures have strong sensing capabilities. In end-to-end supply chains, it is important to sense before responding. To listen to the customer response before reacting. ERP platforms are all about the response. In existing architectures, there is little to no sensing or listening capabilities.
  • If everyone standardizes, we will get there faster. Yes, but we standardized on the wrong thing. The belief was that if everyone standardized on one ERP platform that it would be easier to connect the extended value chain. What the last decade has taught us is that it is the hard work on data standards that is necessary to drive connections. Having the same ERP brand is largely irrelevant.”

Cecere insists that companies need to swallow hard and face facts: “An extended ERP investment does not help you get to the extended end-to-end supply chain goal. Yes, to get there you need strong ERP capabilities; but ERP is not the connector. The connector is the BI [Business Intelligence] layer.” She explains:

“ERP helps to build order-to-cash and procure-to-pay and having a common code of accounts for financial reporting; but, leave it at that. Companies that built their own or used best-of-breed planning capabilities have out-performed companies that have standardized on large ERP platform investments. Remember that the people that made the most money on extended ERP investments were the consultants that implemented the systems under the promises of ‘invest in these systems and the functionality will come’ and ‘80% is good enough.’ To gain insights, network with companies that have done it, and think hard about how you can use new technologies to sense and what drives value-based outcomes in the response. Secondly, focus on stabilizing ERP investments and building Business Intelligence (BI) capabilities. ERP stabilization can take many forms: business process outsourcing, focus on ERP transactional excellence or Software as a Service. Resist the temptation to think that you can get what you need from on vendor. Building end-to-end supply chain capabilities means much more than one throat to choke. When you focus on the BI layer, think about data differently.”

Not only do you think about data differently you think about relationships differently. An integrated end-to-end supply chain requires cooperation and collaboration and that means fostering better trust among stakeholders. For a different take on this subject, read Steve Hall’s post entitled “Supplier relationships and trust — too hot and heavy?” [Procurement Blog, 15 October 2010]. As you think about how relationships and data must change, Cecere recommends that you consider three things:

  • Own BI in the Line of Business: There is an exciting world of BI dawning. Don’t think about BI as it is currently defined, think about new possibilities. Consider how to free the data to answer the questions that you don’t know to ask. Ask How to read unstructured text to listen to true customer needs. Learn how to use downstream data to sense demand through the building of demand networks.
  • Invest in Innovation: Build sand boxes to enable learning. Consider best of breed providers. Look at the mining of unstructured text inputs to improve supply chain sensing, the use of pattern recognition in customer data to better understand demand, advanced analytics and improved prediction capabilities in optimization, and the linkage of scorecards to value-based outcomes.
  • Define new Processes based on Value. Focus outside-in. Put money where your mouth is. Define standards. Make relationships meaningful and actionable. True collaboration only happens when there is a sustainable, meaningful win/win relationship. I had a great discussion with Philippe Lambotte of Kraft Foods on this subject in a taxi on the way back from UConnect. Philippe has put money where his mouth is by defining a program with retailers that enables a menu-list of options that can be used to redefine the relationship for greater value. Knowing that imposing a one-size fits all program on retailers will not work, the program has a menu of options with appropriate discounts. Reward performance against these options based on scorecard performance. Based upon the options selected by the retailer, bracket-based pricing is determined.”

In her earlier post on this subject, Cecere concludes, “Let’s face it, the major system integrators have made a lot of money selling a false promise. It is time for the good times to end. We have some hard work to do, but our futures depend on it.” Obviously, there is hard work to be done by both companies and ERP providers. Cecere’s point, however, is that companies should look beyond ERP vendors if they want to achieve integrated supply chain excellence.