With globalisation we have gone beyond basic ERP. Now agility and the ability tomake changes is amore important feature.
Enterprise resource planning (ERP) systems are playing a greater role in supply chain operations as systems become more sophisticated and easier to integrate with other software. However, users are still looking for performance improvements in key areas such as integration, standards and specialised supply chain tasks.
ERP systems were developed in the 1980s from material requirements planning (MRP) programs designed to coordinate the inventories, schedules and materials needed in manufacturing. It was not long before the code developed for factories was extended to the whole enterprise. Applications for ERP systems now cover most corporate activities.
Suppliers such as the German company SAP were among the first to apply the software to improving supply chain efficiency. Initially, users gained time savings and tighter control over inventories, then major ERP vendors added additional applications such as demand planning, and product life cycle management.
With a central database, an ERP system offers the prospect of consistent data throughout an organisation and enables companies to develop processes that run across departments. “With globalisation we have gone beyond basic ERP,” says Thomas List, director SCM applications for EMEA Oracle. “Now agility and the ability to make changes is a more important feature.”
The systems have had an immense impact on large businesses by making it possible to reduce a hotch potch of separate systems for each business activity and replacing them with end-to-end software.When a delivery arrives at a loading bay an ERP system automatically generates journal entries and vouchers for other parts of the company, bringing corporate processes together and eliminating silos of information.
The downside is that although ERP systems are good at working with modules from the same supplier, they are not so hot at swapping information with other ERP systems or best-of-breed applications. Until recently it has not been in the best interests of software companies to agree the kind of standards that might open up ERP systems.
Many companies that invest in large enterprise ERP systems find that they need to integrate additional functionality from specialist software providers to be able to maximise efficiency. In the area of logistics, there are many areas that require deep domain expertise such as customs, compliance and freight forwarding.
“In our experience many large enterprise ERP systems lack the depth of functionality to manage niche but critical supply chain activities,” says Rob Smith, vice president of marketing, Europe, at Kewill. Smith argues that it is important to work with vendors that not only have the domain experience but can provide tight integration without the need for time-consuming and costly reworking.
The need to integrate ERP systems and add additional functionality has spawned a large service industry. However, ERP systems may become more open thanks to the arrival of service oriented architectures (SOAs) in which software modules are presented as services with standard protocols and functionality.
“Eight or nine years ago each manufacturer had its own legacy operating systems,” says James Hannay, vicepresident of Northern Europe for systems integrator Zetes. “We find they are much more standardised which makes it easier for us especially since we can be hardware agnostic and allow customers the opportunity to keep their (hardware) estates.”
Oracle has recently announced links to products made by arch rival SAP. “SOA is a way of standardisation that supports end-to-end applications,” explains Oracle’s List. “It is the same in telecommunications where there are different standards for mobile phones in different countries but they are linked through international standards.”
Despite the downturn major UK companies are still making multi-million pound ERP investments. Premier Foods, for example, is in the throes of a business transformation programme called Project Fusion, which features one of the biggest introductions of ERP software in the country. Over 400 people are working on new SAP systems that will cover warehousing, manufacturing and planning across Premier’s businesses.
At the moment the focus is on Hovis bakeries where ERP software is being applied to help the company get a better handle on bread distribution from its 23 sites. As wrapped bread comes off production lines it is associated with a particular barcode by fixed scanners before moving to interim storage locations or directly to a truck.
Barcodes are read to obtain a destination for each item and the system sends an advance notice to the site so that staff know whether to cross-dock goods, put them into stock, or distribute them to end users.
When deliveries reach a distribution centre they are scanned again to record their arrival. Hovis will use a putto- light system in its distribution centres to guide workers to the correct locations for storing incoming goods. The year-long project will be complete in March next year.
However, expensive ERP systems can be let down by the quality of data they use. Research and advisory company Gartner Research claims that large companies lose 5.7m euros per year on average because of poor data quality. Some four per cent of companies Gartner Research spoke to cited a 70m euro loss due to data problems.
“Poor data is a constant threat to supply chain efficiency and can infect an ERP system through entry errors, data migrations from legacy systems and because data decays naturally over time,” says Colin Rickard, managing director of DataFlux, a company that sells tools to improve data quality.
“If the dimensions of a product to be shipped are inaccurate in the ERP system, this can result in inadequate space being allocated at a distribution centre or warehouse. When the product arrives it might need to be shipped back.”
ERP suppliers vary enormously and specialise in different types of enterprise. The market leaders SAP and Oracle focus on larger manufacturing and distribution firms, while other vendors including Consona, Epicor, Exact Software, Infor, Microsoft and Sage tend to serve midmarket and small users.
The ERP industry, like most of the IT business, is going through lean times as customers sweat their assets, postpone their investments and switch to cheaper ways of providing access to IT. Bruce Richardson, chief research officer of AMR Research, a firm which specialises in providing advice on supply chain issues, says sales are down so vendors have cut costs by laying off people and shutting down facilities. A further round of consolidation among vendors is also underway.
In the current economic climate those companies that are in the market for ERP systems are likely to be in a strong negotiating position. All suppliers have been forced to mark down their offerings. This includes maintenance and support which can cost up to 20 per cent per year of the initial price tag for a package, making it the most expensive element in an ERP investment.
Cost reduction is also at the heart of what remains one of the biggest trends in the business: software as a service (SaaS). Increasingly, software is being offered over the internet hosted on central systems capable of servicing large numbers of users simultaneously.
Gartner forecasts that within two years more than a third of software will be delivered over the internet rather than running on machines in customers’ premises. The model is attractive because the software only has to run on one platform. This means SaaS users can roll out new applications quickly and update then much more regularly.
In addition, smaller companies find paying regular rental can be more attractive than making one-off capital investments in software. And they do not have to employ expensive IT specialists to run their systems. The downside is that users do not have the same control over their applications with SaaS. Customising software, for example, is not usually possible and users with particularly sensitive data are often reluctant to entrust it to a third party.
Recent research from consultancy Accenture among 300 IT directors at the 2,000 largest UK and US companies indicates that SaaS still has some way to go to win over top executives. Only seven per cent of UK IT directors and 15 per cent of their US counterparts believed that SaaS would replace in-premise software for now.
However, there are some situations in which SaaS seems to have a definite advantage.WeSupply, a supply chain SaaS company, says that its service comes into its own when a company wants to link up with suppliers that can’t see its ERP system. To make a connection the suppliers have to set up their own web portal, which often provides less sophisticated communications.
“You can do most of this stuff with ERP, but it is not optimised for multiple partners and people are saying that they don’t have the stomach or the budget for that kind of integration effort,” saysWeSupply managing director Anthony Payne.
AlstomTransport, the French train maker, is a big user of SAP software, but the company could not share forecast demand and commitment data between internal and external sites. The company usedWeSupply to share the information. “For supply chain processes where you need visibility, a collaboration system that is focused on your in house needs is not the best solution,” says Payne.
So despite the cost and effort of large-scale ERP systems, users are still prepared to take the plunge.