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Expert Insight

By Sheila Zelinger
Vice President of Portfolio Marketing

SAP

Date: June 22, 2011

Supply Chain Comment: Can Your Internal Value Chain Economically Handle Growth Opportunities?

Profitable Growth Requires Cooperation and Coordination Between Supply Chain Operations, Shared Services & Collaborative Planning Activities

The global economy is on the mend again.  Morgan Stanley is forecasting a 3.2% GDP growth for US in Q2, 2011 and expects the growth to continue in the second half of 2011. According to IMF, after reaching a rate of 8.3 percent growth rate in 2010, GDP growth in Asia is projected to average nearly 7 percent in both 2011 and 2012. Even the euro-zone economy, affected by the Greece and Ireland debt crisis, is expected to grow at a modest 2% according to several projections. As the global economy continues to improve and provides organizations ample growth opportunities, how can they ensure that their internal value chain is collaborating effectively to take advantage of this growth in an economical manner?


Challenges with growth


As the global economy improves, most organizations will increase their sales and marketing investments in countries and regions across the globe. According to a PRTM study, more than 85 per cent of companies expect the complexity of their supply chains to grow significantly by 2012. Specifically, more than three-quarters of respondents expected an increase in the number of international customer locations; more than two-thirds expect a higher number of product variations will be required to fulfill local customer expectations. 

 

This increased global activity places immense pressure on an organization’s existing business processes and information systems in the following ways:

  • International subsidiaries need to capture demand forecast from their local markets as accurately as possible and roll it up to corporate.  This roll-up enables corporate to get a consolidated view into global demand, plan globally, make appropriate sourcing decisions and create an effective and efficient supply plan. This view also enables corporate to get a better perspective into market dynamics including regional/country variations at the local level – and only subsidiaries can provide this information at a high level of accuracy through their forecasts.   Enabling corporate to plan globally based on consolidated demand also allows a subsidiary to ensure on-time delivery and high service levels to its local customers.  Many organizations find that their corporate departments end up drowning in roll-up spreadsheets from their subsidiaries and find that their demand consolidation and supply planning process not only becomes cumbersome and error-prone, but the manual consolidation also leads to extended planning cycles.

  • As an organization expands onto new markets (or increases penetration into an existing market) there are increasing implications / demands on the business, processes and technologies in order to ensure both the subsidiary and extended enterprise are operationally efficient.  For example, it now has to support an increasing volume of cross-company purchasing and sales, as finished goods make their way from internal manufacturing to international subsidiary distribution sites to end customers and trigger appropriate internal invoicing/billing. Manual processes and methods for tracking internal purchasing break down in light of higher volume/diversity of product flow.  In addition, an increase in intra-company transactions also puts additional stress on the financial consolidation process.

  • International subsidiaries also need to comply with appropriate regulatory and internal controls.  Regulatory controls include export compliance policies, local financial reporting requirements as well as local privacy rules. Spreadsheet-based processes begin to break down for many companies and increase the corporate risk of non-compliance (and resulting penalties that accompany it).

  • In order to enjoy profitable growth, organizations continue to keep an eye on cost efficiencies even as they expand their operations.  For example, corporate procurement wants the subsidiary operations to utilize corporate procurement policies and approved suppliers to get better purchasing terms.  Many informal systems for sourcing and purchasing break down and cannot easily support such requirements.

  • Finance and risk management is also a key consideration for the business. For example a key priority for corporate treasury would be to have visibility into ongoing subsidiary cash requirements, as well as cash collections to optimize their cash management function and to eliminate liquidity surprises at a subsidiary.  Similarly, a key focus for the corporate controller would be to have accurate and timely roll-up of GL accounts, so the financial consolidation is accurate and timely. The corporate risk management organization would want to focus on ensuring that the subsidiary is in compliance with all local regulations, as well as meets corporate risk and compliance guidelines.  Informal systems are not able to meet such requirements.


Internal Supply Chain Complexity

 

As international subsidiaries grow in scale and number, the internal value chain of the global enterprise becomes more complex.  This growth places immense pressure on both the subsidiaries and the corporate, especially if the subsidiary’s existing processes and systems (including interactions between the subsidiaries and corporate) are manual.

If you are the CIO of your organization, you have three key priorities – a) how do you establish operational efficiency across subsidiaries and extended enterprise to make sure that your internal supply chain continues to support growth in an efficient and economical manner? b)  how do you ensure all internal stakeholders have the right visibility and transparency across the entire operation in order to enable them to have better understanding of the business to make accurate and timely business decisions c)
how do you ensure you have all the systems and processes in place to ensure that your subsidiaries remain compliant at local level.

 

With these three priorities, you start with first assessing the existing information systems and business processes at each international subsidiary to identify if:

  • Your systems have the capability to easily and accurately rollup key information from subsidiaries such as demand forecast, sales orders, accounts and cash inflows-outflows to corporate to streamline planning and operations.
  • The corporate office has adequate visibility into key operational metrics of the subsidiaries, so it can see if subsidiaries are executing in accordance with their operational plan.
  • Adequate financial or regulatory controls exist at the subsidiaries and are implemented via the systems, so any unpleasant surprises in the future can be avoided.

Some subsidiaries have information systems that allow them to meet this criterion.  They can not only drive sustainable operational efficiency in their operations, but they also ensure that they are in sync with corporate on day-to-day operational and financial flows and their internal supply chain is effective and efficient. Rest of the subsidiaries need to replace their information systems.

 

Once the subsidiaries that need a new system have been identified, the next step is to identify the right systems for the subsidiaries.  Multiple options are available.  For example, one option is to implement the existing corporate ERP system at these subsidiaries. Your governance model, together with the business requirements of the subsidiaries, should drive the decision.  If the governance model calls for more autonomy in the decision making and execution at the subsidiary level, then these subsidiaries should not implement the same business processes as corporate, because they may get smothered by process overload.

In addition, some of these subsidiary sites such as manufacturing plants or distribution centers may have unique industry, functional and regulatory requirements that may differ widely from the rest of the organization.   Finally, the IT budgets at these subsidiaries are much smaller.  As a result of these factors, implementing the corporate ERP system at these subsidiaries in an autonomous/semi-autonomous governance model may not be a viable option.   Such a deployment model is called two-tier ERP model, where corporate and subsidiaries have different ERP systems by design.  Once a two-tier ERP model is established then ERP systems that meet the budget, as well as functional and regulatory requirements of the subsidiary can be shortlisted. 

 

A two-tier ERP model ensures that the subsidiaries implement a system that meets their functional and budget requirements, while supporting the information roll-up and visibility needs of the corporate.  However many mid-sized ERP solutions, that are functionally fit for subsidiaries, only support loose data integration with corporate ERP systems.  Such subsidiary systems may allow you to implement a two-tier ERP scenario where subsidiaries need to operate very independently or only need to provide rolled-up data for consolidation at headquarters.  However, streamlining internal value chain to support growth requires corporate and subsidiaries to closely coordinate activities and collaborate with each other, which requires tight process-level integration between corporate ERP system and subsidiaries’ ERP system. 

When subsidiaries select such a tightly integrated ERP solution, they can easily coordinate demand and supply planning with corporate to ensure on-demand delivery at right costs or coordinate purchasing activities with corporate to benefit from lower purchasing prices, better payment terms, and higher quality levels. Internal purchasing processes and financial consolidation also become streamlined. In corporate governance models where headquarters and subsidiaries collaborate around activities such as budget planning, have common functions, such as shared finance or HR services, or have common processes which require coordination, tight process-level integration between subsidiary system and headquarters ERP systems is a key requirement. 

Final Thoughts

To ensure that international growth is not tripped by lack of lack of coordination and visibility between subsidiaries and headquarters, you need to identify the subsidiary operations that need a new system and then evaluate a new ERP system for them. Deploying the corporate ERP system at subsidiaries may not always be the best approach, especially if subsidiaries have very different business models, economics or other business requirements.  A two-tier ERP model is the right option for such scenarios. 

Many ERP systems may allow you to implement a two-tier ERP model for subsidiaries that operate very independently or only need to provide rolled-up data for consolidation at headquarters.  However, to support profitable growth, cooperation and coordination between headquarters and subsidiaries is needed in their supply chain operations, shared services and collaborative planning activities.  For such a scenario, two-tier ERP model with process level tight integration between the corporate and subsidiary systems is the best approach.


Sheila Zelinger is Vice President of Portfolio Marketing at SAP, which includes SAP Business Suite as a corporate ERP system, as well as multiple solutions including SAP Business All-in-One, SAP Business ByDesign and SAP Business One for mid-sized organizations, including subsidiaries.

Agree or disagree with with our guest contributor's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

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About the Author

Sheila Zelinger is Vice President of Portfolio Marketing at SAP. Before joining SAP, Sheila was an Associate Partner with Accenture, where she served over 35 clients worldwide in high technology, media/ publishing, communications and semiconductors.  Sheila has a MBA from Stanford University.

For More Information:
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Zelinger Says:


To ensure that international growth is not tripped by lack of lack of coordination and visibility between subsidiaries and headquarters, you need to identify the subsidiary operations that need a new system and then evaluate a new ERP system for them. 


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