Two-tier ERP systems in manufacturing are on the rise because of a number of factors, including cost savings, increased...
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specialization at the subsidiary level and a growing market trend toward ERP consolidation, according to analysts.
In a typical two-tier deployment, a parent company keeps an existing ERP system, while subsidiaries or other business units deploy a second ERP system, whether on-premises or on-demand, for their specific needs.
“[Companies are] recognizing that the same ERP isn’t really going to work at the division level that it does at the administrative, corporate level,” according to Cindy Jutras, an independent analyst based outside of Boston. At the same time, many are looking to consolidate systems to save money and become more efficient, she added. More on two-tier ERP
Josh Greenbaum, principal of Enterprise Applications Consulting in Berkeley, Calif., agreed. “There’s been some real understanding that there’s a continuous need to improve and to render operations, especially in manufacturing, much more efficient,” Greenbaum said. “I see a lot of that.”
“Much more specific needs”
A company can benefit from having one ERP at the corporate level and a second at the manufacturing subsidiary level because the needs can be so different, Jutras said. For that reason, it’s important for the second ERP to be built with manufacturing in mind.
“At the division level, they may have simpler needs from a financial standpoint, but far more extensive needs in terms of manufacturing and production,” Jutras said. “They need specific functionality to help them manage what’s on the shop floor.”
To illustrate just how different manufacturing needs can be from other industries, Jutras said she recently compiled a list of all the different modules associated with those industries, determining that distributors, for example, need 28 different modules, while the average for manufacturing is 34.
Cost benefits, other drivers of two-tier ERP systems
In his report, The Case for Two-Tier ERP Deployments, R. "Ray" Wang, an analyst and CEO of Constellation Research, writes that nearly half of all respondents in a recent survey are considering two-tier strategies, largely because on-premises systems are expensive to operate. In fact, 80% of the respondents said their on-premises system is too expensive.
Technology advancements are also driving interest in two-tier systems, according to Wang. Two-tier vendors are often able to deliver better industry-specific and geographic capabilities than big ERP vendors, he said.
Two-tier ERP systems also allow companies to take more ownership over the system because they are smaller and easier to manage. “You’re giving people the ability to have a lot more control of their system, because it’s a lot easier to configure,” Wang told SearchManufacturingERP.com.
Software as a Service (SaaS) offerings, though few in number, have also fueled interest in two-tier ERP because of their subscription pricing, frequent updates and upgrades that bring innovation, and quick deployment, according to Wang.
While numbers vary, Wang says the cost savings from two-tier ERP can be significant. “It’s very, very expensive to run core SAP for all your customers. You can run a two-tier system at almost half the cost,” he said.
Wang’s report cites a number of companies that have cut costs by going with a two-tier system, including one Japanese manufacturer that he said was able to deploy local ERP in its North America and EMEA (Europe, the Middle East and Africa) operations at half the cost of a core ERP system. One service-based company cited a 17% reduction in IT help desk costs, according to the report.
Tighter integration between headquarters and subsidiaries can also lead to savings in other ways, according to Greenbaum. For example, if a subsidiary runs out of a certain material, supplies can be routed more efficiently to the facility from another location than if subsidiaries were operating on their own.
“You have a greater operational efficiency,” he said.
ERP consolidation: A little like hip replacement
One reason that two-tier ERP is on the rise in the manufacturing industry is that “rip and replace” no longer strikes fear in the hearts and minds of IT staff as it once did, Jutras said.
For years, she said, ERP replacement was viewed like brain surgery. “If the customer isn’t dying, you don’t do it,” she said. “Today, I view it more like joint replacement, knee replacement. The patient isn’t dying, but if the patient’s uncomfortable enough, you just do it.”
That’s because integration is much easier than in the past, and the benefits outweigh the inconveniences, Jutras said. “You’re going to get so much more interoperability, technology, [and] functionality if you go with a newer solution, as opposed to limp along with those older solutions.”