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Fatal Flaws in ERP Software Create Opportunity for Niche Software in CPG Companies

Written By: Bill Friend
Published On: April 24 2004

Fatal Flaws in ERP Software Create Opportunity for Niche Software in CPG Companies
Featured Author - Bill Friend* - April 24, 2004

Overview

After companies purchase an enterprise resource planning (ERP) system they may discover that the ERP software fails to provide all of the functionality their business requires. These shortfalls have been characterized as "fatal flaws". If a company uncovers a fatal flaw in their ERP software they have three choices: keep their paper-based and labor intensive system, develop in-house software or, look for niche software to "bolt on" to their ERP software. Some consumer goods product (CPG) manufacturers find themselves looking for niche software when they look to improve the operation of their back office functions relating to pricing, trade promotion, and trade receivables after discovering that their ERP system does not provide the depth of functionality needed to completely manage their business issues.

*In Memoriam

An Example Business Problem

If we take a CPG example from the food industry, the pricing methods have evolved into a complex set of business processes that often go beyond the scope of normal ERP functionality. Generally, food manufacturers have a national invoice price for each SKU they produce. The net they ultimately receive for their product is reduced from the national invoice price three factors: "invoice deviations" which are list price concessions that appear on the invoice, "after invoice deviations" which are rebates set up as invoices from distributors, retailers, or foodservice end users for promotional programs tied to product sales; and "trade promotion payments" tied to direct marketing expenses like retail slotting allowances to get shelf space for a product or entrance fees to trade shows.

In the back office operation, all reductions in the net price have to be planned, approved, and tracked to determine their impact on sales. After invoice deviations and trade promotion commitments must also be accrued as liabilities to ensure that they are reflected in financial reporting. The issue of "deduction management" comes up because the back office process actually involves two payment streams—one from the customer to the manufacturer for product sales and the other from the manufacturer to the customer for promotional activities. Often, the customer deducts their claim for promotional activities directly from the manufacturers product sales invoice.

When the complexity of the pricing programs is combined with the complication of deductions the back office operations of food companies can become a quagmire.

For Harold Rosemann, the CFO at Salt Lake City, Utah (US) at Cookietree Bakeries, managing the process of tracking promotion planning to sales results is a critical area. Rosemann wants, "to know how our promotional spending is impacting our sales results, but we also need to keep ahead of our short paid invoices." For requirements like Rosemann's software vendors need to have both promotional planning and deduction management functionality. It is this combination of functional depth that is often difficult to find outside of niche vendors.

Software Vendor Solutions

Software vendors are attacking back office CPG issues in different fashions. As expected, niche software solutions are more focused on industry and segment specific issues.

General ERP vendors all provide pricing management functionality but may not address industry specific issues. Process industry ERP vendors have more experience with the specific industry issues and may include more detailed functionality by industry but may have specific strengths in particular market segments where they have existing clients. Traditional customer relationship management (CRM) vendors are expanding into trade promotion from their traditional account management or call center applications. Like the general ERP vendors, their solutions tend to be broad-based. The following chart illustrates the relationship between the depth of functionality and the breadth of offering of software vendors relating to food industry pricing and trade promotion management:

Niche vendors utilize industry-specific functionality to compete with global vendors. Alex Ring, president of the Synectics Group in Orefield Pennsylvania (US), which is a provider of trade promotion management (TPM) software observes that, "Generic software does not meet the unique needs of CPG. Food is different than hardware, and within food, retail and foodservice are different. As a result there are significant differences in the functional requirements for CPG/TPM software".

Companies that have identified a "fatal flaw" in their ERP usually have very specific requirements for the functionality they need. Dean Abrams, the Senior Vice President Sales and Marketing for Carrollton Texas (US) which is a sales information vendor information retrieval methods (IRM), which provides sales promotion software to the CPG and foodservice industries, finds that in a specialized software niche, "there is a fine line between a packaged solution and one-off custom development". "We understand the foodservice segment but not everyone in foodservice has identical functional requirements." Abrams' point is that niche vendors have to walk that fine line giving companies depth of functionality they need without moving into creating custom software.

Conclusions

The issue of ERP fatal flaws outlined here is characteristic of many that face CPG companies who are looking to apply software to industry and segment specific problems. General ERP and CRM software is designed to focus on general business practices within broad industries. Specialized ERP software, like Process ERP provides solutions for specific industries and even segments within those industries. Niche software can be tailored to a specific industry segment. Jim Stromvig, information services manager at Salem OR frozen food manufacturer NORPAC, has one caveat. Stromvig has found that niche software vendors can provide," functionality that is an improvement over the paper processes but most will require you to make some modification to your existing business practices".

In Memoriam

Bill Friend was a consultant, writer, and speaker who specialized in the application of IT to business problems in the process industries. He was a principal of WR Friend & Associates and had over twenty-five years executive experience in food and chemical manufacturing. Bill co-wrote a monthly column "Managing Software" for Food Engineering (www.foodengineeringmag.com) and was a co-founder of the Food, Chemical and Life Science CIO Forums found at www.foodcioforum.com, www.chemcioforum.com, and www.lifesciencecioforum.com.

He was a colleague and valued contributor to the TEC site. He will be missed.

 
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