The pros and cons of two-tier ERP

The right two-tier ERP approach can deliver some of the benefits of standardization without too much cost or complexity.

Standardizing on a common ERP platform has long been the gold standard in the industry. However, challenges such as globalization, divisional differences and the sheer difficulty of deployment make a one-size-fits-all ERP strategy an impossibility for most companies, experts say. The solution for many companies? Two-tier ERP.

The benefits of consolidating around a common ERP platform are many, from eliminating the need for complex and costly integrations to reducing installation and maintenance efforts for IT. Having a single-vendor ERP solution also improves companies' ability to negotiate better licensing terms and provides a single point of contact for support, troubleshooting and training, according to industry experts.

Despite the myriad upsides, however, those same experts admit standardizing on a single ERP instance poses a set of challenges that are oftentimes too difficult to overcome, particularly for companies that are diverse and have a global footprint.

"Having one massive ERP solution that everyone around the world uses, from corporate headquarters to the smallest distribution center, is typically the best approach," said Mark Humphlett, director of ERP for Infor. "But while larger ERP is great on financials, it's not built and structured in a way that smaller manufacturing operations in smaller countries can get up and running quickly."

Getting started with two-tier ERP

Rather than try to shoehorn a single ERP platform to fit a global corporate enterprise, there are other options that can deliver on the benefits of standardization without incurring substantial integration costs or adding to the complexity.

One of the more popular workarounds is a two-tier ERP approach, which is particularly useful for companies that have come together by way of mergers and acquisitions. With this strategy, a company runs a standard ERP platform at the corporate level to handle financials while allowing divisions or individual plants to use a different ERP solution for day-to-day operations that is better matched to their specific needs.

"A large multi-billion dollar company that acquires a $60 million distribution company in Vietnam probably would not want to consolidate on a large Oracle system -- it's much too large and complex for the smaller company, and it doesn't make sense," said Christian Hestermann, research director for ERP at Gartner.

Companies can approach two-tier ERP in several ways, Hestermann said. They can opt for a laissez-faire strategy, which allows the various divisions and plants to pick their own ERP solutions, or they can establish a limited number of division-tier ERP choices to keep integration challenges to a minimum. Divisions that don't require a high level of interaction with the corporate entity would be well served by choosing their own ERP package, he explained. Yet if a division's business processes are extremely intertwined with the rest of the organization and there's a requirement for constant access to the central system, IT might need to exert more control over the pick of the operational ERP system. "The technical integration has to follow the business needs for integration," Hestermann said.

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Cindy Jutras, president of Mint Jutras, a research and advisory firm specializing in enterprise applications, noted that companies should avoid letting operating units dictate multi-tier ERP choices at all costs. "If you are running a different ERP at the operating level, it needs to be consistent," she explained. "If you have a whole bunch of manufacturing facilities and distribution facilities with different needs, you might need two different ERP packages, but you don't need 12."

Standardizing around a handful of ERP applications, as well as formalizing common business processes is key to minimizing the pain of integration, Jutras said. In fact, according to the Mint Jutras 2013 ERP Solution Study, 68% of world-class companies are creating standards for ERP across multiple operating locations, with 52% of all other companies following a similar path.

To keep the risks and technical challenges at bay, Hestermann advised IT organizations to build out a two-tier ERP architecture with applications that support out-of-box integrations. In lieu of that, IT groups can create a catalog of prebuilt integrations between the main system and a handful of recommended smaller systems to help give divisions autonomy while also minimizing the integration effort for IT.

Sticking with one ERP vendor

Another solution to two-tier ERP is to choose complementary systems from the same ERP vendor. Recognizing the shortcomings of a one-size-fits-all strategy, the leading ERP players -- including SAP, Microsoft, Oracle and Infor -- offer a range of choices that map to company size and scope of requirements. As a result, companies could opt for a single-vendor approach without having to standardize on a single ERP platform, according to Joshua Greenbaum, principal at Enterprise Applications Consulting.

"A single vendor choice simplifies IT choices and a lot of the discussion around protocols, data models and user experience," Greenbaum said. For example, an organization could run SAP at a corporate level and Business One or By Design in a subsidiary, allowing them to command global purchasing power with SAP while shifting the burden to the vendor to address integration and business process development issues.

Without getting some sort of handle on ERP standardization, companies are looking at a significant investment, both in terms of the time required to support and maintain myriad product lifecycles as well as staffing for the requisite skills in business process management and data integration. "This is certainly not the recommended approach, but it's often the reality that everyone has to live with," Greenbaum said.

Follow SearchManufacturingERP on Twitter @ManufacturingTT.

This was first published in September 2013

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