Fatal Flaws in ERP Software Create Opportunity for Niche Software in CPG Companies
Author - Bill
- April 24, 2004
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.
An Example Business Problem
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.
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.
the complexity of the pricing programs is combined with the complication of
deductions the back office operations of food companies can become a quagmire.
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
vendors are attacking back office CPG issues in different fashions. As expected,
niche software solutions are more focused on industry and segment specific issues.
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:
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
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.
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".
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
a colleague and valued contributor to the TEC site. He will be missed.