Deciding whether or not to opt for an Enterprise Resource Planning (ERP) or best-of-breed system has long been a difficult decision for logistics providers. Historically, ERP systems have been thought of as cumbersome, restrictive, and costly. As a result, companies turned to the more flexible best-of-breed systems, which offered a simpler, quicker integration process.
Today’s global trade environment and predicted economic downturn means competition is likely to stiffen even further in 2008. Lorne Jones, director of industry marketing, logistics and wholesale distribution at Sterling Commerce, says: “Ten years ago the average number of trading partners for an organisation was 15, it’s now 65, with 35 per cent of companies trading globally.
“Growing recognition that ERP systems are not effectively addressing some of these challenges that businesses face in an increasingly global, multichannel market, for example, collaboration across enterprise boundaries, has meant that many are now turning to boutique-style, best-of-breed systems that specialise in and address a specific business pain.”
But this is changing. The need for end-to-end IT systems has given rise to ERP vendors expanding their supply chain offerings and creating additional modules to the core software – what they call ‘bolt-on’ systems.
Andrew White, research vice president of Gartner, recently told an SAP insider conference: “A company’s business network is becoming a primary source of competitive differentiation. Managing relationships with geographically dispersed customers, suppliers and partners, has resulted in a need for increased levels of adaptability, collaboration and visibility when dealing with supply chain systems.”
A successful supply chain demands a fast information flow. Patrick Crampton-Thomas, SCM business development director at SAP, says: “Fast cycle times with automated data flows between planning and execution systems drive accurate demand fulfilment while holding minimum inventory safety stock.
“ERP systems enable this through tight integration and data flow between planning and execution and across organisations. Information exchange can be near real time.”
The UK is one of the most expensive areas to operate, what with high oil, fuel and property prices. Therefore, “it’s important for a company to be able to look at where its products are stored, where they should be, and move them on fast,” says Sarah Taylor, senior industry director of Oracle Retail.
“Interfacing properly is key to achieving the right transparency – having the right information at the right time to make accurate decisions and planning. It must be as standard as possible, as it can be maintained more cheaply if it’s a standard interface.”
Lorne Jones says: “Effective collaboration across enterprise boundaries is crucial to success so competitive advantage can only be achieved if business processes are automated, streamlined, integrated and coordinated with those business partners.
“For example, warehouse management is increasingly becoming a battleground for competitive differentiation by third party logistics providers. As warehouses grow and evolve to cope with the challenges and complexities of fulfilling demand in a multi-channel retailing environment, 3PLs need to consider a solution that supports not only their immediate business strategies but also longer term strategic growth.
“The answer lies in a move towards Service Orientated Architecture (SOA)-based systems which help to ease the challenge of integrating point solutions – with existing legacy systems and connects seamlessly with legacy ERP systems if that is what is already in place.”
SOA is an automated workflow solution designed to speed up integration. The technology enables the more sophisticated best of breed systems to be plugged into the ERP core.
Supply chain management specialists such as Manhattan Associates, are taking a two-pronged approach and creating systems which are complimentary to an ERP system. Allen Scott, UK managing director of Manhattan Associates, reckons there has been a mood swing in businesses in the past year, whereby companies are now moving away from investing in ERPs because of the high cost.
But Mark Greatrex, product & services director of ERP vendor Lakeview, says costs used to be measured by the ratio between money spent on the licence and the money spent on implementation. Five years ago, for every pound spent on licence fees, five times that was spent on services. Whereas, now, the ratio is more like one to one.
Crampton-Thomas of SAP, says: “Problems generally come from the boundaries of an organisation. ERP systems have invested significantly in collaboration systems that share data, and support processes between network partners like outsourced manufacturing, vendor managed inventory and collaborative quality management.
“Companies should concentrate on their organisation, network and business processes first, not the tools and features and functions. Best-of-breed can bring advantages in niche speciality areas, but ERP Suite systems, which are comparable in capability in many situations but with the advantage of tightly integrated business processes across the organisation, execution and planning.”
When it comes to integrating ERPs and supply chain management systems, there are a number of issues. “Best-of-breed implementations need a custom data environment to stage data between ERP and planning where missing elements are added,” says Crampton-Thomas.
Integrating best-of-breed means building a legacy integration environment which carries a cost of ownership and which drives up migration and upgrade costs over time.
Also, “the number of interfaces can be large to support real time end-to-end processes. As well as delaying the project, this inevitably leads to compromise on integration and any advantages of specific functions or features can be lost where the process is compromised.”
Three years ago Oracle expanded beyond ERP and bought best-of-breed retail system providers: Retek, ProfitLogic and 360Commerce, to form Oracle Retail, providing high-end industry-specific software. Oracle integrated the best-of-breed IP with its own systems, so as to remove the complexities and costs associated with integration from its customers.
Sarah Taylor, Oracle Retail’s senior industry director for EMEA, says the type of businesses that would benefit from an Oracle system are complex ones which operate across multiple channels that have a turnover in excess of £80 million. “These are the types of businesses that demand an ERP system – they need a package that they will be able to grow with.”
By offering a fully scalable, integrated ERP system that spans the whole retail business – including planning, merchandising, supply chain management, in-store operations, multi-channel retailing, finance, human resources, and real estate management – it can reduce the total cost of ownership for its customers while easing integration and providing flexibility of implementing either key solutions or an entire system.
“Companies can see a return on their investment within a year,” says Taylor.
Bernd Kosnar, business practice leader of Basware Corporation, which provides Enterprise Purchase-to-Pay and Financial Management systems, says: “The time and cost involved in implementing an internal SAP invoice processing tool is precisely why many companies opt for an external best-of-breed third party expert system that is a module of a state-of-the-art purchase to pay system.
Kosnar reckons what users need is a system which easily and seamlessly integrates into the existing SAP platform, without needing timely and costly upgrades and custom coding. He says the best way to approach this is to either use a tool installed inside SAP, or a SAP-accredited best of breed third party tool working alongside SAP.
“You’d assume that a product programmed inside SAP would be the perfect fit, developed with the latest functionality and easily integrated. You would be wrong on both counts,” says Kosnar.
Much like the SAP databases, office and business intelligence tools, third party IP workflow software inside of SAP is not as advanced or as flexible as some outside systems. So-called ‘open-heart surgery’ systems which operate from within the SAP environment also need to be professionally installed, integrated and maintained by SAP engineers, which can be costly and can require key systems to be newly customised or even re-done.
“By opting for a SAP-accredited third party automation system, you’ll also get the buy in of the CIO, who has the reassurance of simple out-of-the-box installation and easy integration via certified SAP interfaces – meaning no downtime, no impact on SAP resources and minimal set-up cost,” says Kosnar.
Lawson now delivers QuickStep solutions – pre-configured, industry-tailored systems which are easier and faster to implement. Martin Hill, vice president of marketing, EMEA at Lawson, says it’s now possible to install systems within three to six months.
Hill says: “The cost of integrating systems has fallen dramatically and by cutting implementation times, total cost of ownership is reduced.” Pork Farms, which supplies savoury pastry products, chose QuickStep for Food and Beverage to help improve business processes and provide real-time operational transparency.
The reduced cost of ownership means implementation time has halved. Alan Webster, chief information officer for Pork Farms, says the company will also benefit from savings in consulting and internal resourcing costs and reduced risk. Best-of-breeds deliver advanced systems which focus on a particular area, but tend to come with a large cost of ownership in supporting and maintaining interfaces.
But John Jackman of 3M Supply Chain Solutions, points out that while the licence cost of ERP modules such as warehouse management may be provided at little or no cost, there may be a high per-user charge. “These licences may already be part of an enterprise or pre-purchased licence deal but the supply chain operations may still be charged internally for these.
“Even if initial costs are low, companies have found the gap in costs shrink when viewed from a five to seven year total cost of ownership. In general, over this time period the costs involved in making custom modifications and implementation services to meet changing requirements are significant and grow over time.”
Jackman reckons ERP users have found it difficult to drive continuous improvement and provide direct benefits as they are unable to quickly and easily adapt the system to changing requirements. “ERP systems generally need programming that demands a skill set that is expensive and may be difficult to find. Logistics Managers also often find their needs are down the ERP project queue and so have to wait months or longer for even simple changes.”
At the SAP UK and Ireland User Group conference last November, SAP’s UK managing director Steve Rogers, revealed his frustration at how the majority of users were only using a “modest slice” of the software they had bought.
ERP consultancy West Trax, confirmed this in its SAP Cost/ Benefit study. The study, which took into account 13 industry sectors, revealed that less than 50 per cent of the standard SAP code that incurred licence and maintenance fees was being used. It found that more than a third of customers were not using their custom programmes, but were still maintaining them.
“Redundant customs programmes are often kept in a system for years. This is a critical issue for expensive upgrades, especially if the organisation does not know which programmes have been used and which have not.”
David Long, chief executive of West Trax, says: “One of the challenges companies face once the excitement of the system’s roll out has passed, is the language barrier between the IT people that run the system and the senior executives.” With these complex systems, a lot of jargon is used to explain them, which the boards often don’t understand.
Martin Hill of Lawson agrees, saying: “Companies that have had the most success from their ERPs are ones where the bridge between their business and IT people has been breached.”
John Jackman of 3M reckons the future functionality of ERP systems may be tied to upgrades. “Companies operate on differing versions of ERP. While ERP vendors have made incremental changes to the warehouse functionality over time functionality in older versions, it is still considered limited.
“Convincing the senior management to upgrade their ERP version to accommodate more advanced features and functionality is unlikely to happen in the appropriate timescales to benefit the current supply chain operation.”
SAP is now urging users to upgrade their systems, and has said UK organisations are among the slowest to adopt the latest version of SAP’s core ERP product.
One of the reasons for this reluctance to upgrade, according to David Long of West Trax, is the high levels of customisation in current systems. In the systems analysed in the study, between 20 and 40 per cent of the transactions used were customised, racking up development and support costs on top of SAP’s licence and maintenance fees.
“These enormous systems must be constantly monitored and realigned or they will collect customised programmes, which act as ballast, and become less finely tuned.
“Often the case is that customers want to change the system to fit old business processes. But if you’re going to invest in an ERP system, you can’t just implement it, you have to alter the whole business outlook.”
Linda Rodway of Proteus, says: “Because of the instantaneous need to have information at your fingertips, ERP vendors are moving towards browser-based systems, enabling you to log into a system anywhere in the world.”
There is a trend for increased investment in role-based user interfaces to match the experience users get when they surf the web or do their email. But it’s not just a technical issue, ERP companies have a wealth of experience and IP in business processes and the workflows and information needed to support them and this can be built to improve efficiency and user experience.
For example, SAP uses Adobe forms, where users can create ERP data and records (like purchase orders) via an Adobe form. Similarly users can interact with SAP’s Demand Planning tool via Excel, not just basic upload or download, but with the ability to maintain hierarchies and create alerts for new data via Excel.
Kosnar says SAP users are turning their attention to extending process automation across the organisation, beyond core processes to traditionally paper-intensive areas such as procurement and invoice processing.
“If critical data from key documents such as orders, invoices, goods received notes and so on, is taken into digital form that is usable in the SAP core and other management systems, it’s possible to make a real dash toward efficiency.”
“While traditional invoice management and workflow solutions deliver savings up to 40 – 50 per cent, in a full e-invoicing environment automation of invoice processing activity can bring about cost savings of 70 – 95 per cent – making it a compelling business proposition,” he says.