Can ERP Meet Your eBusiness Needs? Part Three: The Effect of eBusiness on Your Business

  • Written By: Cindy M. Jutras
  • Published On: April 2003



The Effect of eBusiness on Your Business

The need for speed and flexibility has been just one by-product of the Internet Age. Today the Internet allows us to reach more people in more places in a time frame that was previously inconceivable. Where it once took mature companies thirty, forty, even fifty years to penetrate new, international markets, today a tiny start-up can establish a global presence on the Web virtually overnight.

But with that global opportunity comes global risk. That presence, to the casual web-site visitor, is virtually indistinguishable from that of its well-established competitor, flattening the advantage of size and previous market presence. Therefore, the "dot-coms" of the day present a twofold risk. Even as a market leader, traditionally a "bricks and mortar" company, you may suddenly find new and unexpected competitors threatening your market share. But the risk extends even further. The ability to market and sell to expanding markets can easily exceed a company's ability to fulfill the demand along with the expectations that are generated.

What does this mean to your overall business strategy? Certain functions within your business have the most potential for being impacted by eBusiness. This is true whether you actively participate in eBusiness initiatives, or if eBusiness is simply being conducted around you.

This is Part Three of a three-part note.

Part One raised the question.

Part Two discusses how ERP forms the foundation for today's eBusiness.

The Sell Side of eBusiness

The first of these functions is Sales. The Internet can be viewed as an alternative sales channel and you will need to construct a strategy that reflects the possibility of channel expansion. For some companies the decision to sell product over the Internet or not will essentially be made for them. Today, when the decision is made outside your own executive suite, it is usually in the form of denial. Many large retail giants prevent you from competing against them directly with an electronic storefront. If these major retailers represent a large portion of your current or potential business, you will find the decision an easy one. You value their business enough to preclude competing against them in any manner.

However, many businesses today will be confronted with this decision. Will you sell direct over the Internet, and if so, what are your goals and how do you avoid channel conflict? In many ways, this basic business decision is no different than when only traditional choices are considered - for example the decision to augment your direct sales force with a distributor network or other similar indirect channels. How do you do that and avoid cannibalizing your existing market? In many cases, distributors are recruited for some added value, allowing you to reach a different segment of your market than you have previously been able to satisfy. Can an electronic storefront offer you the same benefit?

Certainly one of the most compelling reasons for eBusiness initiatives is the potential for market expansion. Traditionally there have been three ways to expand your market through brand new product introductions, through new packaging and marketing of variations of your existing products, and through geographic expansion the opening of new territories. It is through this latter option that the Internet offers the most compelling advantages, particularly if there are sparsely populated or remote territories which were economically not feasible to cover with a direct sales force and expansion opportunities through indirect channels were limited or non-existent.

On the surface the cost of opening these new "territories" might appear to be negligible, buried in the fixed cost of the information system investment of opening and maintaining your electronic storefront. However you cannot ignore the added cost of marketing to these new territories to make your brand and your Web presence known. The World Wide Web is no "field of dreams" where if you build it they will come. Even in the world of eBusiness, instantaneous market penetration only exists on television commercials.

However, once you replace or supplement your direct or indirect sales force with an electronic storefront you relinquish a certain level of control over your growth. With a direct sales force you limit growth by exercising control with your carefully planned recruitment efforts. The same can be said in terms of recruiting distributors. However, once you establish a web-based sales presence, you are less able to gate that growth, and without new or revised methods of forecasting demand, you may well be caught in an out-of-control situation.

Effects on Your Back-Office

Your electronic storefront not only opens you up to increased and unplanned for demand, which is a good problem to have, it could also potentially change the profile and ordering patterns of your customers. If you previously supplied large retail chains at a regional or corporate level, you may now be dealing with individual stores or the end consumer. Your order volume could go from one order per region per season to one order per store per week. The corresponding increase in order and transaction volume could very well be one or several orders of magnitude. Unless you plan accordingly this could bring your current order entry system to its knees.

The selling and order administration processes are only the front office considerations for your entry into the eCommerce marketplace. There are also back-office considerations, most specifically the impact on your planning, warehouse and distribution efforts in other words, fulfillment. Everyone has either a funny story or a horror story to tell from the 1999 holiday season. Christmas gifts that arrived in January. The two line item sales order that came in two different shipments. One had your name spelled correctly, one didn't. What does that tell you about the integration of their order system with their fulfillment system? Christmas gifts that arrived in February. Products returned and never replaced. Credits issued only after multiple phone calls. Christmas gifts that arrived in July. Not being able to exchange the item you ordered on-line at the local retail store. Christmas gifts that never arrived.

As the profile of your typical order changes and your order volume increases, this will have a ripple effect throughout your fulfillment process. In the case where large retail customers previously ordered in aggregate and now order on a store-by-store basis, consider the impact on your forecasting and demand planning. You now have to deal with the demographic and location-specific variability previously smoothed by the aggregation and consolidation that was previously performed by the retailer. This can have a significant impact on your demand planning and your subsequent ability to respond to customer demand without a significant increase in inventory levels and the corresponding expense.

Delivery to multiple locations can also have a very significant impact on your delivery mechanism, typically one of the first functions to be considered for outsourcing. Yet if you go from performing your own delivery to using other public or private carriers, what impact can this have on your business system requirements, and in turn your ability to manage this expense?

Now go to the next step and consider the impact as you add your own electronic storefront to the mix. You could easily go from shipping pallet loads to picking, packing, and shipping individual items. Not only does your transaction volume significantly increase but your warehousing strategy may very well need to be re-engineered allowing you to maintain and transact inventory in any variety of units of measure still more considerations for your ERP system.

The Buy Side of eBusiness

Expanding your selling efforts is not the only eCommerce transaction you need to plan for in formulating your eBusiness strategy. The purchasing or procurement modules of ERP systems have long been modeled after how purchasing departments have operated for decades. Purchase requisitions go through a series of approvals. The automation of this requisitioning and approval process will vary between companies and between ERP systems, but ultimately the requisitions are funneled to the buyers of the purchasing department. Buyers are not only involved in vendor selection and negotiation, but also in the placement and administration of Purchase Orders, as well as monitoring vendor performance. While it is the first set of tasks vendor selection and negotiation that adds the most value to the enterprise, typically it is the function on which they are able to devote the least amount of time.

In an effort to automate and streamline the administrative efforts and to more carefully enforce spending policies, more and more companies have turned to Internet procurement. Internet procurement or eProcurement allows your employees to initiate purchase requisitions through an automated approval sequence that ultimately connects directly to approved suppliers with little or no manual intervention. Resultant potential for savings per Purchase Order has been nothing short of dramatic. ERP has made great strides in integrating the material requirements planning (MRP) and purchasing functions, resulting in automating purchase replenishments of direct materials. Therefore most eProcurement initiatives begin with maintenance, repair and operational (MRO) or indirect purchases.

I have heard companies quote any number of estimates of the cost of processing an indirect purchase order, ranging from $50 to $350 to "I don't know." Some of these numbers are truly frightening considering the cost to process a Purchase Order for a $25 hammer can sometimes cost the same as processing a Purchase Order for a $300,000 software package. Yet once the technology infrastructure supporting Internet procurement is in place, these costs can drop to pennies per transaction.

The National Association of Purchasing Managers estimates that a third of indirect purchasing is noncompliant with company policy. But rarely do personnel deliberately ignore policy. They are simply finding expeditious ways to get items faster and more conveniently. Effectively implemented eProcurement efficiently controls access to items, pricing and suppliers, making fully compliant, on-line purchases easier and faster.

Several factors will determine your ERP systems' ability to handle this modified business process. The first and most obvious requirement of Internet procurement is whether your purchase requisition and purchase order system is web-enabled. Secondly, what level of training is required to use the system? How truly intuitive is interaction with the application? Is the process sufficiently automated through the use of workflow technology to eliminate manual intervention that adds to the cost you are striving to reduce? And finally, consider the impact on your system when instead of 2, 5, 10, or even 50 trained buyers using it, you unleash potentially hundreds or thousands of employees as casual and occasional users. This has both security and performance implications.

And now let's bring this full circle. The net effect of this process is to automatically place orders with your suppliers. Ultimately this means an order is captured in your vendor's order entry system, placing demand on their fulfillment processes. You must ask the same question of your vendors' systems as your own. First of all, how open and compatible are their back office systems? This has a direct impact on their ability to inter-operate with you. And also, has their ability to market and sell to expanding markets exceeded their ability to fulfill the demand and the expectations you have of their performance?

These and other considerations are discussed in more detail in Chapter 5 of the book* ERP Optimization: Using Your Existing System to Support Profitable eBusiness Initiatives where we specifically define how your eCommerce strategy and the implementation of eCommerce applications can have a major impact on the ultimate goal of full eBusiness integration. This chapter will also discuss the different business models available and the inter-dependencies between these models, your business processes and your information technology.

*This article is an excerpt from the book ERP Optimization: Using Your Existing System to Support Profitable eBusiness Initiatives by the author. The book can be ordered through www.crcpress.com or www.amazon.com.

Summary

As you can see, as we enter into the world of true eBusiness integration, the opportunities are boundless for increased global market penetration, streamlined operations and reduced costs. But those opportunities do not come by accident, nor are they without cost or risk. Both the speed of business, as well as the speed of change itself has made time the most precious of commodities today. Companies are forced to become more agile, and more flexible as more and different demands are placed on them. No longer is the combination of price, quality, and delivery sufficient. Today inter-operability within integrated business communities and virtual enterprises is the new fourth dimension of success.

While ERP systems have provided companies with a backbone for managing internal business processes and controlling transaction level activity at an arm's length from their suppliers and customers, now businesses must take the next step, shifting their focus outward. Are you ready? eTransformation is not a single giant step, but a series of smaller steps that become a journey to full eBusiness integration. This has been an excerpt from the book* ERP Optimization: Using Your Existing System to Support Profitable eBusiness Initiatives by the author. The remaining chapters of the book are meant to help you focus on the steps necessary to exploit these opportunities, avoid obstacles and minimize your risk through the intelligent application of technology.

*This article is an excerpt from the book ERP Optimization: Using Your Existing System to Support Profitable eBusiness Initiatives by the author. The book can be ordered through www.crcpress.com or www.amazon.com.

About the Author

Cindy Jutras is a seasoned software and business professional with over 28 years of experience in applying software solutions to business problems. Experienced in a wide range of functions related to the software industry, including sales, marketing, product development, customer support and product management, she is also an industry observer and trend-setter in business and business applications. Having worked with manufacturing companies for the full extent of that time, she is both a visionary and a pragmatist.

She is currently the Director of Solutions Management for SSA Global Technologies, since their recent acquisition of interBiz, previously a division of Computer Associates. At Computer Associates she was the divisional Vice President of Product Strategy and was instrumental in defining and guiding the product direction of ERP systems as well as advanced technology products.

Ms Jutras' work has been published and she is frequently quoted in industry publications on a variety of topics including manufacturing, ERP, eCommerce and eBusiness management, and CRM. She is the original author of the concept of "Virtually Vertical Manufacturing" and speaks at industry events on this and other topics.

Ms Jutras can be reached at cjutras@ssax.com.

 
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