The network effect
Research finds companies lack confidence in ERPs to deliver supply chain visibility.
The concept of an enterprise resource planning system (ERP) is so ensconced in the business world, it seems hard to believe that it was less than 25 years ago that the term was actually coined.
Today, most organizations rely on ERPs to some extent to “automate and support a range of administrative and operational business processes across multiple industries,” as the analysts at Gartner put it.
And they should know — Gartner is credited with first using the now ubiquitous acronym.
Overtime, logistics practitioners have come to rely on their ERPs to help them manage procurement, payment, and execution of transportation activities, among other things. This is partly due to ERP vendors providing specialized modules that address the supply chain’s unique nuances.
But it’s also due to the fact that many companies have invested big capital in their ERPs, and expect the length and breadth of their organizations to use that asset to its fullest extent.
The emergence of cloud-deployed logistics and trade software applications, however, has changed the equation over the last decade. Those same logistics practitioners are now cognizant of browser-based systems that can address specific supply chain functions. One way to think of it is sending in an army to address a problem versus using special forces.
Of course, it’s much less black and white than that. ERP vendors are adapting to the market, offering cloud-deployed modules in areas where they face competitive pressure from software-as-a-service (SaaS) vendors.
But a new report suggests that ERP vendors also face another constraint — they are inherently better at connecting internal parties within an enterprise than connecting to partners outside that enterprise.
That makes sense. Part of the continued lure of the licensed ERP model is that it provides a secure environment for valuable proprietary information to be shared. The growth of cloud-deployed models hasn’t changed that perception. According to American Shipper benchmark research, shippers still use installed software to address logistics and compliance more often than they use SaaS solutions (which tend to be cloud-deployed), despite all the buzz about cloud and SaaS.
But the report, Supply Chain Visibility in Business Networks, released in March by the advisory firm Supply Chain Insights, points to the limitations of relying on an ERP to deliver the internal and external network connectedness that modern supply chains need.
The report asserts that because companies don’t have confidence in their ERP to bridge the gaps between supply chain visibility expectation and actual performance, companies have to rely on a patchwork of more manually-oriented technologies — like EDI and spreadsheets.
“Companies are seeking new and deeper forms of supply chain visibility through business networks,” the report said. “They want to be more agile and the current IT architectures are not meeting this need.”
Indeed, part of the argument cloud-deployed solutions vendors make is that supply chains need to function more like LinkedIn or Facebook than an internal messaging system.
“I’m hearing a lot now about the distinction between systems of record (ERP) and systems of engagement (collaboration, cloud),” Greg Johnsen, chief marketing officer at GT Nexus, said in an EBN chat in March. “In supply chain this distinction is really critical. Supply chains are not chains, they’re networks. It takes a system of engagement to ‘connect’ the players and enable orchestration. This isn’t the domain of ERPs, per se, but if you look at any company today, it’s defined by its outsourcing and distributed network. Companies are networks. But they’ve lacked the IT systems to behave as such.”
GT Nexus has been at the forefront of espousing the view that shippers, logistics services providers, carriers, and other parties have to be linked in a meaningful way to wring the greatest efficiencies out of their relationships. What’s more, when a shipper connects its partners to a platform, other shippers can then leverage those same connections, creating a multiplier effect not possible if a company’s connections are limited by its ERP.
“On the question of ERP versus cloud network platforms, I have to point out that these don’t necessarily replace the ERP systems,” Johnsen said. “Companies are going to need good internal systems, systems of record, to manage their internal operations and records. But when it comes to connecting those systems to the systems and processes of external partners, this is where newer cloud collaboration platforms can yield huge advantages. They work together, or they should.”
There’s also the complication of multiple ERP instances across an enterprise.
The Supply Chain Insights report found that the average respondent had 6.5 instances of an ERP across their company, with nine in 10 respondents saying they had an ERP. Eighty percent of the 78 respondents were manufacturers (the rest mostly a mix of distributors, 3PLs, and retailers). Among the manufacturers, nearly two-thirds were process, and the bulk of the other third were discrete.
Only 46 percent of respondents said they felt confident in their ERP provider to give them the supply chain visibility they need. The top two gaps in ERP confidence versus importance (in other words, is the ERP performing well enough to give the respondent confidence) were third-party logistics management and transportation.
The area where ERP importance was best aligned with confidence was in manufacturing and supply chain decisions within the company. The results speak to a dissonance between a traditional ERP and modern supply chain functions.
Among the greatest gaps between supply chain visibility importance and performance were inter-enterprise order management and transportation/logistics. Given that order management is often the domain of ERPs, the results highlight there can be a breakdown in visibility from that crucial step to the planning and execution of a shipment.
But it’s important to note the major ERP vendors have not stood still. While many companies may operate outdated versions of their chosen ERP — and are likely paying the price if they are trying to manage complex supply chains with it — the ERP vendors have evolved to offer cloud-deployed modules, faster processing that enables robust planning exercises and, in general, highly competitive logistics and transportation management tools. Because of their massive install bases on the ERP side, they also boast big market share in transportation management systems and other logistics tools.
ERP vendors would also argue their evolved solutions inherently tie into the connected ERP more easily than a third-party system or network would, providing visibility from order management to final delivery that the Supply Chain Insights report suggests is difficult to achieve strictly through an ERP.
The argument largely rests on whether the shipper considers systems integration more crucial to their supply chain than partner connectivity. That’s not to say that both can’t be had, but priorities must be made.
And the reality is that many organizations still abide by the mantra of centralized, not shared data, even if they are relying on third parties to manage their execution.
But “many decentralize today by outsourcing key logistics functions (origin ops, consolidation, deconsolidaton) to strategic 3PLs,” Johnsen said. “This is done for cost advantages but also expertise. My point is that if you go there, if you are moving to a more distributed and outsourced model for key processes, you are going to need a very different kind of information system. You’ll need a network collaboration platform so that you can see and control the myriad processes that are distributed and, execution-wise, beyond your control. ERP has been woefully lacking in this respect, and layering EDI on top of it doesn’t solve it either.
“I think to go ‘decentralized’ you really need an information platform that can connect you with your partners and allow everyone to see and act together. This is a lot of what cloud platforms are doing now. They behave more like social networks and get everyone on the same page. Very different than the ERP systems we grew up with,” he said.
Aside from the Supply Chain Insights report’s findings about ERP’s visibility limitations, it also addressed the extent to which ERPs eat up an organization’s IT budget.
The report found a clear connection between spending on ERP and IT budgeting for other technologies. Nearly half of respondents said ERP spending played a major role in their company’s 2013 IT budget. Less than 10 percent said it played a minor role. That’s largely because companies predominantly see the priority for their investment in IT to be centered round security or data maintenance (i.e. ERP’s strength).
Respondents cited order execution and manufacturing as the functions they are best equipped to handle through their IT systems, while supplier procurement, visibility, and analytics ranked at the bottom. Again, this is suggestive of companies relying more on ERP than on specialized solutions designed to address particular supply chain needs.
“Business leaders need to work with IT to align IT spending and future plans for supply chain visibility,” the report advised. “This needs to include the rationalization of ERP spending, the maximization of private networks (where available), and the qualification of new forms of public supply chain visibility solutions.”
Gartner, meanwhile, suggests that companies don’t get bogged down by their sizable investment in ERP if it isn’t
working for particular areas of their
“Don’t fall victim to the sunk cost fallacy — the fact that you’re heavily entrenched in a system does not mean you should keep investing in it to do something that it simply is not designed to do,” according to Gartner’s paper The Rise of the Postmodern ERP and Enterprise Applications World. “ERP works well in static operations where the need for connectivity is small, but must be supplemented for success in dynamic, intercompany environments. Companies must bolster enterprise IT with cloud solutions that extend functionality and connect the network of trading partners. The path is clear: connectivity leads to visibility leads to agility.”
This article was published in the May 2014 issue of American Shipper.