There has been lots of buzz lately about two-tier ERP. What does it really mean, and how do you decide if the strategy is right for you? What are the keys to a successful ERP deployment?
In the survey for our study, we clearly defined tiered strategies to include three different approaches:
- Single-tier: all business units, divisions or locations use the same ERP.
- Two-tier: one ERP is used at the corporate level (Microsoft in particular calls this “administrative ERP”) and a second standard (often referred to as “operating ERP”) is used for business units.
- Multi-tier: one ERP runs at the corporate level with several standard ERP solutions for business units, depending on their function or location.
Now, this type of definition only makes sense in the context of multiple operating locations, divisions or business units. In fact, 67% of the survey respondents had more than one operating location served by ERP. Even small companies (defined as those with annual revenues under $25 million) averaged 2.5 operating locations. The average climbed to 10.7 in companies with revenues over $1 billion.
We asked survey respondents with more than one operating site if they had established a corporate-standard ERP system or systems. We looked at the overall results, but also dug deeper and compared standards for what we classified as “world-class” implementations against those that were not (“all others”; see Figure 1). “World-class” refers to the ERP implementation itself and is based on a composite metric consisting of results achieved since implementing ERP, progress against company goals and some universal metrics for current performance.
We found those that have achieved world-class status had taken a more standardized approach to implementing ERP across operating locations. Notice in Figure 1 that 97% of multi-site, world-class implementations have defined corporate standards.
Figure 1. Have you established a corporate standard for ERP solution(s)?
Source: Mint Jutras 2011 ERP Solution Study
While others also had defined standards, 10% didn’t enforce them, and 11% had no standards at all. But that’s not the most interesting part. While 80% of all others used a single standard (or, single-tier strategy), multi-tier strategies outnumber single-tier strategies in world-class implementations by a factor of almost 2 to 1 (Figure 2). Thus it appears that not only does establishing and enforcing companywide standards contribute to success, but deploying the right solution to meet the specific needs of each business unit is also critical.
Figure 2. Single vs. multi-tier standards
Source: Mint Jutras 2011 ERP Solution Study
When multi-tier ERP makes the most sense
It seems fairly intuitive that the needs of a corporate or administrative ERP may differ significantly from those at the divisional or operating-unit level, particularly when those operating locations are manufacturing facilities. Corporate is largely concerned about processes such as accounting and administration, and operations such as procurement, that might be shared across divisions. The plants need to manage production and delivery.
If all the operating locations are quite similar, a single ERP solution at the operating locations can complement the corporate ERP for a two-tier strategy. If they are dissimilar (perhaps corporate serves only as a holding company for very diverse operating units or subsidiaries), a single ERP solution may not meet this diversity of needs. It is clear that world-class implementations are focused on satisfying the real needs of the individual organizations.
Understanding multi-tier ERP integration
Often multiple divisions form an integrated business network, a term often used by SAP. This is why requirements for integration should play a significant role in determining a strategy for a single-, two- or multi-tier ERP integration strategy. Even a simple, two-tier strategy requires data from operating locations to be rolled up to corporate. This can be as simple as the operating locations feeding corporate with general-ledger transactions or more complicated because of various business relationships between operating units. Customers might be shared. One manufacturing location may be a feeder plant to another, supplying components or processed materials that are consumed, further processed and assembled. The inter-company transfer of goods may be complicated by crossing international boundaries. All these details must be worked out from an operational and accounting standpoint, as well as a master data management perspective.
The more “out of the box” this integration is, the easier and cheaper it will be to execute. Having SAP or Oracle as the corporate ERP system increases the likelihood that integration from operating locations to corporate headquarters will be available off the shelf. Why? Simply because these vendors are installed at corporate headquarters far more frequently than any of their competitors.
So even if an interface is not available completely off the shelf, it is likely someone has already developed one from your ERP to SAP or Oracle. This is less likely to be the case even with some of the other large ERP vendors such as Infor, Sage and Microsoft, all of which grew to be multibillion-dollar businesses through acquisition and have assembled diverse product portfolios. None of these assembled portfolios include a system that is dominant in corporate headquarters around the world.
How SAP, Oracle compare
What about the vendors chosen for the operating locations? If there is an advantage in having SAP or Oracle at the corporate level, can the same be said for the operating sites?
Certainly, dealing with only one vendor can have its advantages. Some think of it as “one throat to choke,” while others prefer a more positive spin and call it “one back to pat.” In this scenario, it would appear SAP does have an advantage over Oracle, which, like Infor, Microsoft and Sage, acquired its “other” ERP products. In contrast, SAP has developed its portfolio of ERP products organically along with programs to support integrated business networks with SAP All-in-One, SAP Business One or SAP Business ByDesign at the operating level and the Business Suite at the corporate level. Oracle’s Fusion product line would appear to have the same philosophy, but it has only just become generally available after six years of development.
But that is only one side of the integration equation. What about the integration between operating locations? Passing data between two instances of the same ERP can be far easier than between different ERP platforms, but only if master data and processes are standardized. And that’s a big if. A certain openness and support for interoperability is a big factor. Yet success will depend far more on the design of workflows, processes and master data than on the specific ERP solution.
So, yes, defining standards for ERP is crucial to success, regardless of how many tiers are involved. But there is no single correct or even best approach to standardization. Carefully evaluate the needs of all locations, including corporate headquarters, map out the sometimes intricate relationships between them and define a strategy that includes integration of people, processes and technology.
ABOUT THE AUTHOR
Independent analyst Cindy Jutras is founder and principal of Mint Jutras, a New Hampshire-based research firm. She was previously a vice president at Aberdeen Group.