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Can ERP Meet Your eBusiness Needs? Part Two: ERP is the Foundation

Written By: Cindy M. Jutras
Published On: April 29 2003

Can ERP Meet Your eBusiness Needs? Part Two: ERP is the Foundation
Featured Author - Cindy M. Jutras - April 29, 2003

"Virtual" Integration

The strongest companies in the past were those that were vertically integrated. By being self-sufficient through each step of the entire process of transforming pure raw materials into a finished consumable good, and taking the added responsibility of delivering that product to the end customer, the strongest chain has been forged. By having a single company responsible for each of the steps in the entire process, that company has the greatest possible control, the least contention for materials and the best chance of synchronizing all the necessary components of the process.

However, there are inherent weaknesses in this approach. While this reduces tension between the links, this is basically the most rigid of supply chains. Since no company can achieve excellence in everything, this approach is also the most likely to produce a weak link, and the most susceptible to failure as a result. And if that weak link fails, there are fewer alternatives that can be immediately implemented in order for the process to maintain the speed and integrity of the value chain.

This has caused companies to carefully evaluate product offerings and business processes in order to determine the potential for outsourcing. Whether it is through the purchase of subassemblies or finished product, the contracting of manufacturing or distribution services, or the outsourcing of customer services or information technology, the goal is to create a more efficient, responsive, and flexible environment. While companies have tended to become less vertically integrated in attempts to focus on their core competencies, this also has, and will continue to, necessitate new ways of companies doing business with each other. The value chain has lengthened and become more complicated, yet expectations of response time and delivery performance have risen dramatically. These new business relationships, depicted in Table 1.1, are established in an attempt to re-create the ability to control the entire process, while spreading and reducing the risk factor. As a result, the most successful companies are those who fully participate in and demonstrate leadership within an integrated business community.

These new business models involve multiple companies working cooperatively and collaboratively together, in a seemingly seamless manner, as if they were a single, virtually vertical enterprise. A company who can successfully inter-operate in this way can claim to have reached the goal of full eBusiness integration.

Table 1

Traditional Manufacturing Virtually Vertical Manufacturing Full eBusiness Integration
preferred suppliers with approved alternatives

fixed make/buy decisions
interchangeable sources of supply
buffer inventory reduces tension between organizations and inflates working capital lean, just-in-time inventory reduces working capital supply chain wide planning
supplier sees immediate orders only shared business goals and forecast collaborative planning and scheduling
standard order to cash cycle Purchase Order/Sales Order/Invoice/Cash point of use consumption vendor managed inventory consignment inventory self billing procedures credit card purchases
traditional payment methods electronic funds transfer
EDI Electronic Commerce Internet Enablement

As a result of this push towards full eBusiness integration, businesses face challenges that force them to push the envelope of business information systems. ERP grew from its predecessors of MRP and MRP II, constantly expanding its solution footprint to address more and more of the needs of the enterprise. Yet ERP was not conceived to look beyond the "four walls" of the enterprise, regardless of how expansive those walls became, simply because the concepts of MRP and ERP were born in a time when companies were run as independent enterprises with arm's length relationships with customers and suppliers.

Not so long ago, if you delivered a good product on time, at a reasonable price, and you paid your bills in a responsible time-frame, how you managed your company was your own business. And ERP was designed to help you manage that business. With a successful ERP implementation you could process orders, manage inventory and production schedules to produce product within lead time. You could invoice customers, pay suppliers and balance your books. How automated your processes were was your business alone. Whether your information was managed using clerks and filing cabinets or on-line systems was transparent to your customers as long as you provided them the care and service they demanded. The fact that few companies fully exploited the powerful capabilities that led them to purchase their ERP system in the first place was a sad reality but an easily kept secret. Until now.

*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.

This is Part Two of a three-part note.

Part One raised the question.

Part Three will discuss the effect of eBusiness on your business.

eBusiness Equals Full Exposure

As more and more integrated business communities emerge, companies will find that what used to be a private issue is now a public concern, at least in the eyes of an integrated business community.

I was recently at a manufacturer in the apparel industry who was evaluating whether to replace their existing ERP solution or to consider alternatives that would leave it in place, but "technology enable" it. One of the directors expressed a concern over implementing a new ERP system because of a recent experience with one of his suppliers. In the past the manufacturer had been able to quiz this supplier on its ability to respond to a previously unanticipated demand. With its previous systems the supplier had been able to respond within a day. However, their new system required an order to be placed in order to do any kind of "what if" analysis, and therefore they could no longer respond to these speculative inquiries. What should have been strictly an internal limitation of their new ERP system (or perhaps a training issue with the user) has now become a visible concern of their customer. The end result for the supplier will probably be the loss of this manufacturer's business, simply because they will find a supplier who is easier to do business with.

As you approach eBusiness, whether you do so eagerly or are dragged there kicking and screaming, you will find your business much more exposed. Experts in eCommerce and eBusiness routinely caution executives to reexamine business processes before blindly electronically enabling them, because doing so is the equivalent of throwing open all your doors and windows to public scrutiny. However, continuing to use this as an excuse for lagging behind where you know you need to be, is just as dangerous.

The inward focus of ERP and its predecessors has had an insular effect on companies. It has been one of the barriers some companies have erected to protect themselves from the reality of our changing world. And they have survived, some have even prospered by simply focusing on producing a high quality product, at a reasonable price, delivered on time. But most of these companies are already feeling the pressure of our changing economic climate. They are finding that standard products, which they can accurately forecast and stock on their shelves, no longer necessarily meet the needs of their customers. They have found that thirteen week lead times are no longer acceptable, nor even ten weeks, or three weeks.

Customers are becoming more demanding. While sales may remain strong, their ability to deliver begins to suffer. These companies are feeling the effects of our rapidly changing world, in spite of the barriers they have erected to protect themselves from this reality. What happens to these companies as their customers or even major suppliers become more demanding and start to require some forms of inter-operability as a condition of doing business with them? How will they react to this change? Especially when competition can spring from any direction today.

Back a couple of years ago, speaking at a business conference in Sydney Australia about the concept of virtually vertical manufacturing, I had a member of the audience challenge me with a question. He said, "I have too many problems internally to start collaborating and inter-operating within a virtual enterprise. I'll never get to that point."

I asked him when his house was the cleanest. Of course, he admitted that it was the cleanest just before company was due to arrive. He also admitted to knowing some people who never cleaned their houses unless company was coming. And those were the very same people who were most likely to shut the doors to some of the rooms instead of getting them in order.

My point? Sometimes you need an excuse to get your house in order. So maybe your inventory accuracy in general is an embarrassment. So maybe you don't use collaborative planning or replenishment techniques with all your customers. But when your largest customer suddenly requires you to support same day shipments, doesn't it make sense to clean up that room in the house first, leaving some other rooms closed for now?

Beyond "Quality Price - Delivery" to Inter-Operability

ERP forms a foundation for successfully meeting your eBusiness needs. For years companies have judged other companies on the three basic performance indicators of product quality, price, and delivery. Therefore, every robust ERP system has means of measuring supplier performance within these categories. The same ERP systems are also able to measure a company's own performance in meeting the needs of its customers. However, there has always been another, less quantifiable concern that has subtly worked its way into business-to-business relationships. How easy is this company to do business with? In our electronic age, as the way businesses do business with each other changes, we will start to see another measurable performance indicator emerge - one that has largely been ignored by ERP implementations. The mantra of "quality price delivery" will soon be expanded to include a fourth metric of "inter-operability". Successful orchestration of the complexities of a modern business enterprise, particularly in the context of an extended, or virtually vertical enterprise, will be dependent upon a company's ability to share information promptly, securely, and effectively with customers, partners, and suppliers. This efficient exchange of information will be required for organizations to become full participants in the collaborative planning and execution environments that drive the strongest value chains. This communication challenge, being largely, if not exclusively electronic, is further complicated by a perverse diversity of standards. Yet in order for inter-operability - i.e., how easy a company is to do business with to be a viable condition of vendor selection, it must eventually emerge as a measurable standard. And speed and flexibility will be at least two of the components in the equation - how quickly you respond to requests for information and how flexible you can be in providing it in the format desired.

Through the process of eTransformation, companies must focus attention outwardly without losing any of the gains their inward focus brought them previously.

This concludes Part Two of a three-part note.

Part One raised the question.

Part Three will discuss the effect of eBusiness on your business.

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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