ERP goes mid-market
Following its success in Fortune 1000 companies, ENTERPRISE RESOURCE PLANNING SOFTWARE is reaching out to smaller companies.
By Gary Forger -- Modern Materials Handling, 1/1/2000
With good data, we can make good decisions. Good decisions allow us to serve our customers better. Learning how to serve them even better keeps them coming back."That is how Ian Sadler, president of Shenango Industries, measures the value of enterprise resource planning (ERP) software to his company's operations.
Just as important as Sadler's enthusiasm for ERP is the size of his company. This manufacturer of metal castings doesn't have revenue anywhere near that of any Fortune 1000 company, the traditional market for ERP.
In fact, smaller companies such as Shenango are now the new focus of ERP suppliers. According to AMR Research, sales of ERP to companies with revenues of $1 billion plus have actually declined, falling 14% in 1998 alone. Meanwhile, the overall ERP market are charging ahead at 21% annually. In fact, AMR Research is so enthusiastic about ERP's prospects at smaller companies that it projects a rapid and sustainable acceleration of overall growth to 32% annually through 2003.
These smaller companies are becoming known as the mid-market by industry experts. According to analysts at the research firm Gartner Group, the mid-market for ERP is companies with annual sales between $200 million and $1 billion. Neither end of that range has a concrete wall at it, but the numbers are generally accepted as a good bracket.
Moving from the largest companies to the mid-market is going to be more involved than a new marketing campaign. ERP itself is going to have to change.
Mid-market companies have different needs, infrastructure, and resources from the Fortune 1000. In general, that means the software is going to have to become more manageable on several fronts from costs to startup time required. In addition, changes in how supply chains run are forcing ERP suppliers to change how the software operates. It all adds up to a new generation of software that does more with greater flexibility.
The basics of ERP
What makes companies under $1 billion in sales interested in ERP at all is the inherent strength of the software. It acts as a planning backbone for a company's core business processes. In addition to directing many of them, the system also ties together these varied processes using data from across the company.
For instance, a typical ERP system manages functions and activities as different as the bills of materials, order entry, purchasing, accounts payable, human resources, and inventory control, to name just a few of the 60 modules available. As needed, ERP is also able to share the data from these processes with other corporate software systems. And as a data center for the entire enterprise, ERP is as effective in a company with one facility as one with many sites spread across broad geography.
"ERP is the lynchpin in the overall integrated enterprise resource management process," says Carol Ptak, president-elect of the professional association APICS.
But for all of its strengths and successes, ERP has some shortcomings.
To begin, traditional ERP systems are huge, complicated, time consuming and costly projects that are often fraught with obstacles to success. Just ask the people at Hershey Foods about the troubles they had with their new ERP system when it came time to ship Halloween candy last October. There are similar horror stories at companies as disparate as Whirlpool and the maker of Gore-Tex fabrics, W.L. Gore & Associates.
Needless to say, not all projects work out this way. As the box on this page explains, electronics manufacturer Westell Technologies started up its ERP system successfully in a matter of months.
Regardless of the level of success of an ERP system, these projects require an enormous commitment of information technology (IT) department involvement and support. In many cases, the project will be the commanding agenda item for IT for a year or more.
This is due to several reasons. For one, ERP is not a point solution but one that encompasses most major departments in the corporation. This breadth requires a sizeable infrastructure of technology and IT people to start up and then support it. And perhaps most importantly, ERP changes how the enterprise works. That in itself requires training and new procedures, further complicating the project.
In what was once a strength but is now becoming a limiting condition, traditional ERP systems are enterprise bound. "Virtually all activities within an ERP system are directly connected with the financial system," says Gary Langenwalter of Manufacturing Consulting Partners International. As a result, ERP is inward looking with little emphasis on or links to other companies or activities in the supply chain just as those links are becoming increasingly important to a company's success.
For what the Fortune 1000 companies have been trying to accomplish, these characteristics were tolerable. But that is not the case for mid-market sized companies. How ERP must change to reach these enterprises can be broken down into two general categories-structural and supply chain.
Structural changes
On the structural side, software suppliers have already started to rebuild their software so that it can be installed more easily and in less time. This is being accomplished by making ERP even more modular and bite-size for companies with more limited resources.
One supplier, interBiz, has accomplished this by creating a framework for its ERP "that delivers the global command and control that monolithic ERP was intended to deliver," says Jim Coker, vice president of business development at interBiz. "Just as important, the framework does it in less time, for a lower cost, and with more flexibility and higher intelligence," he adds.
This and similar approaches to it are expected to reduce the level of IT support needed to get ERP up and running. Yet another angle here is Web-deployed ERP, which is supported by Oracle and others.
Rather than dispersing ERP to multiple corporate sites and incurring the costs of many servers needed to run the software, Web-deployed ERP centralizes the system. Using the Web to access a single ERP system at a central location, companies can reduce their IT investment on two fronts - hardware and personnel.
Perhaps the ultimate in centralizing the location of an ERP system is something called hosting. In this scheme, the company never installs ERP at any of its sites. Instead, the software resides on the supplier's host computer. The company then accesses the system either over the Web or dedicated lines, minimizing its investment in the software and related servers as well as IT personnel costs. Suppliers especially active in this area include IFS, Kewill, Oracle, and SAP, to name a few.
Hosting also opens the door to another emerging concept sometimes called pay-by-the-drink. Instead of purchasing a certain number of ERP modules, users are charged for access to only those applications within modules that they use - pay-by-the-drink. As a result, end users can minimize their costs by paying only for what they need and use, not for various capabilities that are built into the software but do not suit them.
Such structural shifts in the software also help to deal with the cost issue of ERP. At the Fortune 1000 companies, ERP was typically viewed as a must-have that did not require traditional justification and return on investment reviews. And according to the research firm Meta Group, "ERP projects typically cost users more than they payback in measurable financial result." That is not acceptable to most mid-market companies. "To properly launch the (ERP) project, all involved should understand that this is not a computer project, it is a business decision," points out Dick Kuiper, president of software consultant and integrator Expert Buying Systems.
Changing supply chains
Just as the structure of ERP is changing to adapt to mid-market companies so is the world in which the software works. And this is not a company size issue. Instead, the current rapid evolution of the supply chain and the interconnectedness of companies has fundamentally changed.
Companies traditionally think of the supply chain as a sequence. One company fills an order and ships it to the next company in the chain which then adds its value to the product before shipping it to the next, and so on.
But as consultant Benchmarking Partners demonstrates in the graphic on the previous page, the concurrent supply chain is becoming a reality. In this model, one company is waiting until the last minute to define all of its supply chain needs and then requests materials and components for delivery in a small, short-term window. This requires the supplier to be sufficiently nimble to have anticipated its customer's needs and have those items ready for delivery on demand. In other words, various aspects of the supply chain are working on the same finished product concurrently.
"Companies need a view across all of the supply chain," says Ed Galgay, senior vice president and chief information officer at Ralph Lauren Inc. "We have to view our business as a series of collected processes. And to be able to do that, we have to untrap operational data that runs our businesses," he adds.
To make that happen requires ERP systems to move some distance from the way they were originally built to satisfy only internal needs. Concurrent supply chain activities require ERP to break out of its original model and build links to partners outside the company such as suppliers and customers. "ERP will continue to expand as vendors promote services that include outsourcing, Internet portals (trading communities), and e-commerce applications," says a report from AMR Research.
To make this happen, the software is being modified to include several new capabilities. These include functionality known as enterprise application integration, visibility, collaboration, and customer relationship management. Taken as a whole, the four are interrelated and provide synergistic benefits to users. In short, integration sets the stage for visibility which is a building block of collaboration needed for more effective customer relationship management. There is hardly an ERP supplier not working on all four today, often in an alliance with an established supplier of related types of software.
Integration is all about taking ERP and linking it to other software systems that effect supply chain performance. This is not the way that ERP was built but has become a necessity to ensure it does not remain an inward-looking island of information.
Visibility gives a company a view of its inventory and its status at all stages of the supply chain. That includes stages both within a plant or warehouse as well as outside. A company with such visibility could re-route a unit of inventory to a more immediate customer need than the one originally intended.
The first collaboration tool was introduced early last year by Logility. Known as collaborative planning, forecasting and replenishment (CPFR), the software tightly integrates both the supply chain activities and information about them between trading partners. It takes the capabilities of visibility and extends them to its customers and suppliers, opening the door to better meeting the needs of all in the supply chain in a timely manner.
Customer relationship management focuses on customizing the way that a company deals with each customer individually. It builds a customer order model that starts with the capability to determine if inventory is available to promise for an order. At the other end of the process, it sets a template for how that order will be shipped to the customer.
Or as Sadler of Shenango said, good data and good decisions are what keep the customer coming back. And that's what this emerging generation of ERP is all about.
Recipe for success
"Have you ever wondered why a majority of the time ERP implementations fall far short of expectations, often running substantially over budget and behind schedule," asked Brian Marshall, CIO at electronics manufacturer Westell Technologies at the recent APICS conference.
Westell, however, had quite a different experience when it implemented SAP R/3 in just six months, going live in March, 1999 ahead of schedule and under budget. Marshall offered his ten critical factors for a successful ERP implementation.
1) Every successful project must have a passionate project leader.
2) An ERP implementation must be integrated with a business process redesign effort and positioned as a strategic business issue.
3)The project team must be dedicated to the project and consist of an organizational cross-section of the best and brightest.
4) It's fine to plan big, but implement in short, focused phases.
5) Integrate the design of the business processes with the deployment of the ERP.
6) Avoid modification of the ERP system.
7) Work backwards from unalterable dates to create focus and manage scope.
8) Create a culture of speed and commitment to ensure that everyone takes deadlines seriously.
9) There needs to be a system in place that supports rapid decision making and vests power in the project team and process owners.
10) Use change management techniques to cope with the human dimension of the project.
How ERP works at Shenango
Working out of a single 250,000 sq. ft. foundry and machine shop in Terre Haure, Ind., Shenango Industries supplies metal castings to many industries and the U.S. Navy.
"Our customers tell us that we're an easy supplier to work with. We're a job shop that supplies them with what they want when they want it," explains Ian Sadler, president of Shenango. "We need accurate, real time information to fulfill our mission," he adds.
To do that, Shenango recently implemented an ERP system.
The system helps to establish and maintain inventory, establish product costs, and evaluate cost standards against actual costs. Both base costs and value-added costs are maintained for material, labor, overhead, and subcontract activities.
Also tracked is the cost effect of all material movement transactions. "This provides real-time feedback on how much money we have tied up in work-in-progress and raw material inventory," says Sadler.
In addition, the system inputs and tracks customer orders. Both product- and customer-related data for the entire order cycle from order entry to shipping and invoicing are collected. At the time of order entry, a real-time requirement can be made available to the inventory planner and master scheduler to maximize lead time for the order. The system also maintains and processes back orders and partial shipments. "We need to know where we are any point in time, both as a business in general and with each specific customer job," says Sadler. And ERP provides that capability.
What do you get with ERP?
As monolithic as ERP may sound, it isn't. In fact, the software is composed of many different modules (as many as 60) that connect to the company's financial system. That collected data is then used to project the performance of key corporate financials. This enterprise-centric model of ERP is now being expanded to include new modules that allow ERP to be part of the planning process by the company and its suppliers and customers.
TRADITIONAL CAPABILITIES:
Bill of materials
Accounts payable and accounts receivable
General Ledger
Inventory control
Order entry
Purchasing
Project requirements planning
Routings
Capacity requirements planning
EMERGING CAPABILITIES:
Enterprise application integration
Visibility
Collaborative planning, forecasting, and replenishment
Customer relationship management
Web-enabled applications
Hosting
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