This article written by Alan Kosansky and Jim Piermarini was originally published in Supply Chain Brain.
More than a decade has passed since businesses started using Enterprise Resource Planning (ERP) for managing data and transactions throughout the supply chain. Traditionally, ERP systems have provided transparency and insight into transaction-level data in the supply chain that support important business planning activities. Now, a new generation of applications is being developed to help fill the gaps between general business planning and business-specific, tactical and strategic decisions. These ERP-connected applications offer supply chain executives previously unavailable analysis and insights into the decisions that directly impact customer service, profitability and competitive advantage.
Supply Chains Differences
Supply chains are as different as the companies and people that run them. Some companies view their supply chain operations as a “utility” that is expected to function without any investment in intellectual capital. These organizations are content to rely on industry best practices in their supply chain operations and follow the leaders (or the features that are added by ERP software providers) in supply chain improvement. Other organizations see their supply chain operations as a strategic opportunity to develop a competitive advantage and increase market share. They know that with some small departures from the norm and a modest investment in intellectual capital, supply chains can provide enhanced performance to the business. These companies understand that there are opportunities for creative and unique ideas in the supply chain to improve company performance and achieve business strategy objectives.
Today, many C-level executives see their ERP systems as key enablers to company productivity, and for the most part, they are correct. Since ERP systems perform many valuable functions, there is a natural assumption that they can handle whatever business strategy the company adopts. However, new business ideas by definition run the risk of stressing the ERP system features beyond their ability to cope. Usually these failures are discovered only during the implementation of a new business strategy. So what happens when the ERP system fails to support the new business strategy in certain critical details? Those working in the trenches know this scenario all too well. But, what can be done to implement strategic supply chain initiatives when ERP is not equipped to handle business-specific initiatives?
Making the ERP Work
There are three possible approaches for implementing supply chain planning activities that offer a company a competitive advantage:
1. Figure out how to get the ERP system to do it. This approach works well if the company’s needs align well with current industry practices supported by ERP systems. Otherwise, companies may find themselves going down a path that consumes significant resources for a poor fit in the end. Companies that adhere to this path typically do so in part because there is a strong C-level edict in favor of simple, clean upgrades for the ERP system. Faced with this, the IT organization has enormous power to shape the nature of the supply chain operation to fit within the established ERP norms, and thus can act as a barrier for business innovation and supply chain improvement.
2.Modify the ERP system to provide new functionality. This is an approach often promoted by IT organizations committed to supporting the fewest number of tools. While this is an important cost management objective, it is important to understand the full cost to implement and support the system over the long term. What can be accomplished is often limited by the lack of flexibility in large ERP systems and IT organizations. Since ERP systems are mission-critical systems, the support and maintenance of the core functions are of paramount importance. This task, placed on a limited IT staff, leads to large backlogs of enhancement work and long queue times. And while IT departments are well-equipped to manage their primary assets, few if any IT departments have the requisite domain knowledge to cross over into supply chain optimization. Given long wait times, organizations will often choose the simplest approximation of the business change that can be ushered to the top of the queue. This approach can result in a quick-fix style of strategy implementation, rather than a priority-based feature development, and may leave the most important aspects of the initiative lingering in the queue.
3. Add an integrated solution to the ERP system that replaces one or more functions that are needed to achieve the business strategy. This could be from an out-of-the-box third-party provider, or for full competitive advantage, a targeted or custom supply chain application that integrates with the company’s ERP data. This approach has the benefit of including priority-based features that the current ERP system lacks, and the additional benefit of avoiding the ERP enhancement queue. The downside, however, is that it suffers from the stigma of being yet another application and not the ERP system itself. This usually presents a hurdle that requires a careful analysis to understand the total cost relative to the strategic benefit. While not all business changes will overcome this roadblock, there are good reasons to look at this approach. These include:
- Ensuring a tight fit between the business strategy and the tool execution
- Minimizing the cost, overhead, and extra setup and maintenance in un-needed functions from a shrink-wrapped general purpose tool
- Providing the marketplace with a specialized and unique operation of the supply chain for competitive advantage.
Example from the Field
A leading consumer electronics company with about $2bn in annual sales implemented an integrated solution to its ERP system to manage its order fulfillment process for competitive advantage. The company had recently modified its corporate strategy to increase retail sales through its “big box” customers (Walmart, Best Buy, Staples, etc.). However, key service level agreements were not being met for these customers due to lower than expected order fulfillment measures. A simple inventory analysis recommended large increases in the stock required at the warehouse, with some method of segregating inventory for each big-box customer so it could not be taken by orders from other customers.
In this case, one of the leading causes of low service for customers was that they ordered “just-in-time”. These JIT orders were not being given any priority over other customers’ orders with longer lead times. The company noted that these important customers may have provided accurate plan information, but that was not being used to assure them any better service. The analysis recommended that separate stocks of inventory be set up based on the big-box planning information, and that other customers not be allowed to take from those inventory locations. This would result in a large increase in overall stocks, but should achieve the desired increase in service levels.
One manager questioned this recommendation, wanting to know why the ERP system did not use the big-box planning information to appropriately manage the company’s service levels. She also questioned what could be done to avoid increasing her inventory risk and yet still achieve the business strategy. This is a question many managers face when their analysts say that to improve service you need to increase inventory levels. Often there are alternatives. This key manager’s insight set the path for her company to make a significant shift in their supply chain operations, with remarkable benefits. What follows will answer the question: Can I raise the service level of my key customers without increasing my inventory and capital risk? The short answer is, “yes”. Significant service benefits and risk reductions can be achieved, but only if you are willing to deviate from your ERP’s standard approach to implementing key supply chain initiatives.
The industry standard approach for assigning available inventory to open orders is to use a FIFO (first in, first out) approach. This approach prioritizes orders based on when the order was received and assigns on-hand inventory to those orders that were received and entered into the system first. While this approach has a degree of fairness to it, and is available in all ERP systems, it did not align well with the business objectives of this company. It actually penalized key customers who issued JIT purchase orders while giving ample planning information. These JIT orders would have to wait until all the older orders, from non-key customers, were allocated before they would be assigned any inventory.
The standard ERP process does not take into consideration the customer’s strategic importance or their planning information. Given this FIFO process, the internal recommendation makes sense: set up separate safety stocks for each big-box customer (based on their planning information), in separate inventory locations, and make a rule that directs big-box orders to their separate inventory.
But having separate safety stocks violates the principle that more customers need lower inventory together, than each does individually. Pooling the inventory helps to avoid unnecessary capital risk. The standard ERP FIFO inventory assignment process could be replaced with one that met customer needs more effectively.
The company embarked on a project to take into account several important factors when deciding how much inventory to assign to each order:
- The priority of the customer
- The amount of inventory actually in the sales channel of the customer, and
- The planning information that the customer shared with the company.
Customer priority is a key and strategic factor in deciding which customers receive product, when inventory availability is limited or delayed. This business need meant that strategic and high-volume customers should typically be serviced before others. However, this may not be the case if a strategic or high-volume customer happens to be sitting on a lot of inventory in their channel. In these cases, it may be preferable to share the wealth with smaller volume resellers to maximize the sell-through to retail customers. Moreover, these rules may apply differently for each SKU in a manufacturer’s product line.
The business rules to implement these sorts of complex trade-offs can get complicated. If one wants to retain a certain amount of flexibility in these rules, then the ERP system is a poor place to make these decisions. However, since most, if not all, of the data resides in the ERP system, these decisions must be tightly integrated with the data and transaction handling within the ERP system. So an application was constructed to manage the inventory assignment process in this way to more closely match the business strategy. The new application is run several times a day, extracting needed info from the ERP system, making the assignment of inventory to all open orders, and sending back the info to the ERP system.
Using this integrated solution, overall service levels for these key customers were sharply increased, prompting several supply chain awards from these big-box customers. As a result of the increase in service level, Walmart (a strategic customer) was so pleased they chose to increase their orders of all this company’s products by 100 percent. The overall inventory did not increase.
The new method demonstrated that pooled inventory was an effective approach to containing inventory levels. In subsequent versions of this application, the integration of point of sale data has allowed even more control over the inventory in the various channels to market. As a result, this company has declared this application a business-critical application. It overcame the hurdle, and the application can defend its spot on the chart of critical business applications alongside the ERP system.
Integrated Solution Success
Using an integrated solution to the ERP system was a win-win approach that allows the business the flexibility to manage order fulfillment for competitive advantage while maintaining the benefits of centralized data and the strong transactional handling capabilities delivered by ERP.
But order fulfillment is not the only area where there is opportunity to supplement the strengths of ERP with flexible and powerful business optimization processes and tools. Other areas where leading companies have decided to enhance their ERP capabilities include optimization-based infrastructure planning, sales and operation planning, distribution route and territory planning, transportation bid optimization, transportation fleet planning, and production scheduling.
These are just some examples of where complex and/or strategic business rules can provide competitive advantage through improved supply chain performance. While ERP systems remain the backbone of all successful large business operations today, they are not the only path available to companies who desire to apply innovative approaches to their business and supporting supply chain activities. Global enterprises that seek a competitive advantage now have the opportunity to leverage their ERP investments by integrating optimization-based solutions to key business strategies.