Enterprise Applications--The Genesis and Future, Revisited Part Four: Another Step in ERP Evolution

Enterprise Applications—The Genesis and Future, Revisited
Part Four: Another Step in ERP Evolution
P.J. Jakovljevic - April 3, 2004

Another Step in the ERP Evolution

Hence, enterprise resource planning (ERP) has entered another step in its evolution. While ERP packages traditionally excelled at combining financial control with multi-plant manufacturing and distribution coordination, they generally lacked extended planning and flexible execution functionalities beyond the four walls of the enterprise that can enable one business process today but change rapidly to handle tomorrow's new models. They were also often found lacking when it comes to delivering special financial features such as robust budgeting or international consolidation, summarized data for analysis and trending, as well as in handling real-time, physical events that occur on the factory floor, as opposed to the transaction-oriented bookkeeping functions (see Financial Reporting, Planning, and Budgeting As Necessary Pieces of EPM).

Therefore, there has been the imperative for the new generation of enterprise applications to be more customer-focused and to extend beyond the enterprise through e-commerce interaction and collaboration with business partners. The key to the Internet-driven, dynamic trade environment is agility, which is where traditional ERP packages have stumbled in the past. Thus, early ERP adopters discovered to their dismay that implementing these systems was only the first step toward creating a competitive information technology infrastructure. They and new users alike are now looking for significantly more comprehensive functionality—from advanced planning and scheduling (APS) (see Glossary*) and manufacturing execution systems (MES), to sales force automation (SFA) and even broader CRM;, to business intelligence (BI) and business-to-consumers (B2C); and business-to-business (B2B) e-business tools to name only some —and demanding that they be integrated into their ERP backbone (see Can ERP Meet Your eBusiness Needs?).

Users' visions of ERP are evolving from tactical to strategic, and users are no longer willing to choose between integration and function, since the "one-stop-shop" offering should mean that the releases are synchronized and the integration is maintained amongst all the components. ERP users who have gone live in the past several years have been making purchases of extended-ERP products (bolt-ons) to provide tangible return on investment (ROI) for their multi-million dollar investment. Recently, the enterprises have begun to analyze the viability of IT investments in a quantified manner, instead of doing only feasibility studies, which would consider only whether implementation of a system is possible but not whether it makes viable business sense. For more information, see Justification of ERP Investments; Part 1: Quantifiable Benefits from an ERP System.

Therefore, in response to the above-mentioned inadequacies of ERP software, a new breed of the above-mentioned specialized software has long emerged, named collectively as "ERP extension" software. These components can either be installed standalone or bolted onto existing ERP instances. They can usually be implemented relatively quickly and at a relatively low price, with much more immediate and quantifiable cost savings to the user. Accordingly, during the last several years, the functional perimeter of ERP systems has begun an expansion into these adjacent markets, as most ERP vendors have been busy developing, acquiring, or bundling new functionality so that their packages go beyond the traditional realms of finance; materials planning and management; and HR/payroll management.

As a result, many pundits have also jumped at the opportunity to name this new evolutionary phase by inventing names and acronyms like extended-ERP, ERP II, enterprise business applications (EBA), enterprise commerce management (ECM), comprehensive enterprise applications (CEA) and so on. More important than this contest for creating the catchiest buzzword, possibly in the unofficially accepted ideal form of TLA (three letter acronym), is the fact that most of these notions signify the evolution or enhancement of ERP, rather than its replacement or obsolescence.

Namely, we believe that, within recent years, ERP has been redefined as a platform for enabling collaborative e-business globally. Originally focused on automating internal processes of an enterprise, extended ERP systems increasingly include customer and supplier-centric processes as well. The conclusive evidence of this redefinition is the move of all major traditional ERP players into CRM, e-commerce, and SCM applications, which is the best illustrated by SAP's SCM revenue exceeding the former leaders i2 Technologies, Ariba, and Manugistics.

This is Part Four of a six-part note.

Parts One, Two, and Three covered developments from the 1960s through the 2000s.

Parts Five will continue to discuss ERP evolution. Part Six will look at the future.

*There is a Glossary for the terms italicized throughout this article.

Capacity Planning

The reason for ERP vendors tackling SCM first might be the fact that, to circumvent MRP II's capacity planning limitations, planners have long turned to various ways of off-line (at first, given today's increasing use of memory resident, real-time systems) capacity planning: either manually, with the help of spreadsheet programs, or with the help of relatively new APS systems. APS systems were originally designed as bolt-ons with the idea of plugging into an ERP system's database to download information and then create a feasible schedule within identified constraints, such as finite capacity. The new schedule can then be uploaded into the ERP system thereby replacing the original MRP results. These APS systems typically offer simulation ("what if") capabilities that allow the planner to analyze the results of an action before committing to that action through the ERP system. Some of these systems go even one step further by offering optimization capabilities. They automatically create multiple simulations and recommend changes in the supply chain within the existing constraints. For more information, see Advanced Planning and Scheduling: A Critical Part of Customer Fulfillment.

Further, APS is a subset of supply chain planning (SCP) applications that are designed to provide forward-looking options for future time horizons, by sitting on top of a current transactional system (most often ERP) to provide planning, "what-if" scenario analysis capabilities and real-time demand commitments. SCP typically deals with activities such as developing demand forecasts, establishing relations with suppliers, planning and scheduling manufacturing operations, and developing metrics to ensure efficient and cost-effective operations. It also includes the determination of marketing channels; promotions; respective quantities and timing; inventory and replenishment policies; and production policies. Thus, the typical SCP modules would include network planning; capacity planning; demand planning; manufacturing planning and scheduling; and distribution and deployment planning.

Global Supply Chain Management

On the other hand, while most traditional ERP software enables the integration and management of critical data within enterprises, companies have increasingly recognized the need to deploy more advanced software systems that manage the global supply chain by enhancing the flow of information to and from customers, suppliers, and other business partners outside the enterprise. More recently, the availability and use of the Web has created a demand for software that operates across the Internet and intranets. This global logistics concept merged the above described constraint-based optimization solutions called APS and specialized warehouse and transportation management software (WMS/TMS), resulting in more encompassing SCM, which should include all the processes from the initial raw materials to the ultimate consumption of the finished product linking across supplier-user companies (see The Essential Supply Chain).

APICS Dictionary, the 10th Edition defines SCM as

"The design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally."

In other words, at a high level, the SCM software scope could be segmented into supply chain planning (SCP) and supply chain execution (SCE), while strategic sourcing, procurement, spend management, supplier relationship management (SRM), and product lifecycle management (PLM) components are still considered the extension of the SCM rather than its constituents. Execution functions manage effective procurement and supply of goods and services across a supply chain to ensure completion of the plans, including creating purchase orders, taking customer orders, updating inventory, managing movement of products in the warehouse, and delivering goods to the customer. Hence, SCE includes light/assembly manufacturing, warehouse, and transportation execution systems, and systems providing visibility across the supply chain, given more comprehensive SCE suites have lately evolved consolidating execution components, such as WMSs, TMSs, distributed order management systems, and supply chain inventory visibility (SCIV), to provide a more unified solution to manage the outbound logistics process.

Still, there are two important business problems associated with today's manufacturing planning, materials planning and supply chain environments:

1. SCP applications need to address the lack of accurate logistics costs and service information that would enable more optimized decisions across the entire supply chain. SCP typically generates weekly or daily plans (in a better case scenario), but without adequately addressing the issues that arise almost every instant in dynamic logistics environments. Thus, plans are often invalid as soon as they have been made, while a mere re-planning does not answer the question what went wrong in the first place (i.e., there is no facility to learn from prior plans' inadequacy).
   
   
2. SCE applications need to further address the lack of real-time inventory visibility and event management feedback information needed for SCP to respond to frequent supply chain changes when building and executing manufacturing and materials plans.

The demand for near real-time supply chain collaboration will, in turn, place an increasing emphasis on any company's ability to immediately commit itself to promising orders' delivery dates on a global basis and to consistently meet those commitments ever after. This ATP/capable-to-promise (CTP) aptitude will be made more complex as companies rely on an increasing number of business partners and suppliers to procure raw materials, assemble, and deliver finished goods. SCE is therefore gaining increasing awareness among companies that realize that planning can do only so much without the ability to make the right and timely decisions and execute on the shop floor, in the warehouses or within the entire distribution chain.

However, it would be too nave to dismiss the need for proper planning, because regardless of how responsive a SCE system may be, waiting for chaos to happen and only then trying to act, would be equally disastrous as it has been with compiling nearly ideal plans (through cumbersome algorithms) and never doing anything about executing them or obtaining feedback about their outcomes. As supply chains become more dynamic and operate in near real-time, the lines between planning and execution continue to blur, which bodes well for their functional convergence. Thus, some SCE vendors have started to move beyond pure execution to offer some planning and optimization capabilities, often with the "adaptive" moniker. Companies need real-time information from execution systems to develop and adjust optimal plans, while the execution side should benefit from more realistic plans for some readiness sake, rather than to merely react after the fact in a firefighting fashion. We believe that planning and execution will become much less inseparable in the long term (see SCP and SCE Need to Collaborate for Better Fulfillment).

In any case, the major ERP players already have offerings or at least sound strategies addressing this important need, but, for the reasons of addressing the proverbial ERP/MRP II capacity drawback, they have so far made the biggest dent on the SCP/APS areas, with a raft of ERP vendor long espousing their native solutions (for only some examples, see SAP APO: Will It Fill the Gap?, Oracle APS Makes Its Debut, and Mid-Market ERP Vendors Doing CRM & SCM In A DIY Fashion).

Likely Vendor Strategies

The SCP and APS scenarios of ERP leaders upstaging the pure-play specialists will likely be repeated in many other related markets, where the specialists still seem to be holding out, such as PLM, SCE/WMS, enterprise asset management (EAM)/computerized maintenance management systems (CMMS), or SRM. As usual, the ERP vendors will bet on leveraging existing customers who will have deeply invested in them, and have even reorganized operations around their ERP systems. The promise of these new extended-ERP products from ERP vendors is the link to financial and manufacturing systems (albeit mostly the vendors' own, which is logical at this stage) and links to supplier or customer data in case of their native SRM/CRM systems.

However, the pure-play vendors' "Holy Grail" has become working with information from heterogeneous sources, an order "du jour" within many large organizations, which often have more than one ERP system and/or various legacy systems. This is analogous to the enterprise applications integration (EAI) market, since in larger corporations, customers still may prefer integration vendors with renowned product strength, vertical expertise, financial viability and savvy in extensible\markup language (XML)-based B2B integration, multiplatform integration and workflow management.

Often, best-of-breed specialist offers functionality or capability that mainstream ERP vendors cannot match for some time giving these specialists some breathing space for this ongoing one-upmanship game. After all, the innovativeness of these providers has kept ERP vendors on their toes, forcing them to provide better integration to these add-on applications and/or to develop them internally. For some snapshots of the showdown between ERP and pure players in certain enterprise application markets, see ERP and WMS Co-Existence: When System Worlds Collide, The Different Evolutionary Stages of ERP and PLM and SCE Leaders Partner To See Beyond Their Portfolios.

Finally, in certain areas one can still see a clearer demarcation line between ERP intruders and best-of-breed incumbents. For example, in the PLM market, it would be that PLM solutions are oriented around creative product innovation processes as opposed to the transaction-oriented world in which ERP packages operate best, since the processes such as cost reporting; procurement; sourcing and contract management; resource planning; and monitoring are best accomplished with control-oriented software, like ERP suites built out from financial and analytics modules. However, the ERP suites do not yet fully accommodate collaboration as well as stand-alone PLM packages designed for that purpose. To remain competitive, however, stand-alone vendors would do well to focus on easy integration with ERP suites. For more information, see Can ERP Speak PLM?

The current PLM leaders' superiority, like in the case of the SCM and CRM markets, will diminish as the ERP vendors continue to improve their extended-ERP functionality, collaborative capabilities and accessibility and add universal interfaces, including the new Web Service standards to facilitate access and integration of data outside their own environment. Thus, the PLM and other pure-play vendors alike need to establish as strong a hold on the market as possible before the enterprise vendors catch up, despite some of these applications' proven staying power within IT departments. Especially if the remaining tier 2 and 3 point solution vendors, cannot gain significant traction and distinctive differentiation, they could find themselves in a position of needing to be either being acquired or joining forces with a complementary functional or platform technology vendor (IBM, Oracle, Microsoft, Computer Associates, etc.) via alliance or acquisition.

This concludes Part Four of a six-part note.

Parts One, Two, and Three covered developments from the 1960s through the 2000s.

Parts Five will continue to discuss ERP evolution.

Part Six will look at the future.

Sources and Recommended Further Readings

1. ERP: Tools, Techniques, and Applications for Integrating the Supply Chain. Second Edition; Carol A. Ptak, CFPIM, CIRM, and Eli Schragenheim; The St. Lucie Press/APICS Series on Resource Management; 2nd Edition, 2003
   
   
2. Selected Readings in ERP; APICS Complex Industries SIG, 1999
   
   
3. Maximizing Your ERP System: A Practical Guide for Managers; Dr. Scott Hamilton; McGraw-Hill Trade, 2002
   
   
4. APICS Dictionary; 10th Edition