InformationWeek
Defining The Business Value Of Technology
November 30, 1998
Beyond ERP: New IT AgendaA second wave of ERP activity promises to increase efficiency and transform ways of doing business
By Bruce Caldwell with Tom Stein
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And from our sister publication, VAR Business |
.S. companies toiled for years and spent billions of dollars installing enterprise resource
planning systems to automate key back-office business processes. But the ERP movement is far
from over. A second, more powerful wave of ERP development promises to increase efficiency in
handling transactions, improve decision-making, and further transform ways of doing
business.Now being built onto ERP platforms are applications more attuned to engaging customers and driving profits than the manufacturing, financial, and human resources apps that first defined the market. Some of these post-ERP apps-such as sales-force automation, customer-relationship management, data mining, and supply-chain management systems-have already emerged. Newer ERP add-ons focus on areas such as demand planning, component management, product data management, and transportation management.
But post-ERP development isn't just about new software. Fundamental to this movement are cultural and organizational shifts intended to align IT and business-management objectives once and for all. Owens Corning, for example, created a new organization with its customer service, logistics, materials management, supply-chain planning, and IT groups to address post-ERP challenges. General Instrument Inc. has streamlined product development, improved product data integrity, and lowered costs by using add-on software that channels all product data into its Oracle ERP system. Amoco Corp. built a data warehouse for its ERP-driven operational data and developed interfaces with its intranet, groupware, and E-mail systems to improve decision-making for its sales and marketing organizations.
Toward A New Era
Post-ERP activity seems to follow a clear path. A Deloitte Consulting study of 62 companies to
be released this week segments post-ERP activity into three stages. The first stage entails a
three- to nine-month productivity decline, which is overcome by redefining jobs, establishing
new procedures, fine-tuning ERP software, and taking charge of the new streams of information
created by the platform. The second stage, which lasts from six to 18 months, involves skills
development, structural changes, process integration, and add-on technologies that expand ERP
functionality. The third stage, of one to two years' duration, is one of transformation, where the
synergies of people, processes, and technology reach a peak.
Perhaps most important, ERP forces discipline and organization around processes, making the alignment of IT and business goals more likely in the post-ERP era. This opens a vast array of opportunities for businesses along for the ride. "This is a time when CIOs can have fun," says John Spinetto, managing director of area operations at Ernst & Young, which, like Deloitte Consulting, is eyeing the post-ERP market.
The Deloitte report substantiates many of the findings in an earlier report by Merrill Lynch & Co. The Merrill Lynch report notes that nearly 40% of all companies with more than $1 billion in annual revenue have implemented ERP systems, positioning them to start implementing an emerging class of "corporate optimization and execution" software. Merrill Lynch tags this market at about $500 million today, and projects it to grow to $8 billion by 2002.
But as Owens Corning, a $4 billion maker of building materials in Toledo, Ohio, found out, there's more to post-ERP development than new technology. The cultural and organizational impact on IT organizations is a little short of revolutionary.
Shortly after Owens Corning implemented SAP R/3 for its core domestic operations late last year, its IT organization moved from being mainly a back-office group to one involved in a broader range of core business activities, says Michael Radcliff, former CIO and now VP of Owens Corning's new System Thinking Information Group. Within the new group, IT has become "the linkage point with all our customers and suppliers," he says.
System Thinking is more than just a name for a corporate organization-it's a trademarked name for how Owens Corning does business. Instead of separately selling shingles and various roofing vents, for example, it now sells products, processes, services, and technical support for complete roofing systems. "We're at a point where business and IT goals are the same," Radcliff says.
Among the post-ERP technologies Owens Corning is putting in place is a data warehouse that analyzes the wealth of new data generated by its SAP system. The warehouse provides valuable information on customer profitability, product-line profitability, sales performance, and supply-chain activities. Radcliff is also looking at warehouse automation and tighter ERP integration with shop-floor process control.
Post-ERP Drivers
End-user frustration with ERP applications often drives a business' first post-ERP projects. At
Amoco's chemical intermediates group, for example, the need to channel SAP R/3 information
into more user-friendly applications became apparent as the ERP system was being implemented
early last year, says Kerry Given, IT manager for the unit. "Managers found SAP so unfriendly
they refused to use it," he says. "Few [of our] people use SAP directly because you have to be an
expert."
Amoco turned to post-ERP add-ons to make things easier. Its marketing managers and field sales force can now access ERP-generated reports on customers and competitive information via the Web or Lotus Notes. They can also create user profiles that generate E-mail notices of new reports that are of interest to them. In addition, the Amoco unit implemented analytical applications and a data warehouse to create views of customers by sales and profitability.
"This post-ERP world is where the real payoff lies," says Steve Grossman, SAP project manager at Amoco. R/3 will serve as a platform for providing Amoco with more information on supplier relationships. It will also serve as the foundation for Amoco to buy equipment electronically and manage production plants more effectively. "Implementing ERP is the end of the beginning, not the end of the end," Grossman says. "It's the first step that leads to many other steps."
Unfortunately, companies that launch ERP projects don't always recognize this fact until after the implementation is complete. The Deloitte study finds that the target date for switching on an ERP system often became the ultimate goal, obscuring the business goals that initially drove the decision to implement.
The wake-up call for many companies came when productivity dipped following the implementation, says Steve Baldwin, a senior partner at Deloitte Consulting. Several of the companies that had gone live realized their ERP packages included only 50% to 75% of the technology they needed to get the full benefits of their systems, Baldwin says.
Companies also need to beef up investments beyond the technology. For example, one company that completed its ERP implementation decided to spend another $50 million over three to four years on post-implementation activities, largely around work-force transitions, process measurements, employee incentives, and education. The reason, Baldwin says, is that a business analysis completed after implementation identified $400 million in payback from the ERP implementation, compared with the preimplementation business case that identified $150 million in benefits.
Building Out
ERP is merely a starting point for many companies, says Bruce Richardson, an analyst with AMR
Research Inc., because financials and manufacturing run through the spine of the organization.
Once those back-office applications are in place, he adds, companies want to wire the whole
enterprise, and they're looking at tools for sales and marketing, logistics, transportation, and
even engineering.
Engineering applications may be the most overlooked. While Merrill Lynch identified more than 60 vendors in the corporate "optimization" and "execution" software market it defined, only a handful address the data management challenges involved in designing and sourcing products. These vendors include Agile Software, Effective Management, Industrial Computer, and Metaphase Technology for product data management; Aspect Development for component/supplier management; and Trilogy Development for product configuration.
General Instrument hasn't overlooked these products. In fact, these systems have helped the $1.8 billion Horsham, Pa., telecom equipment maker dramatically increase the accuracy and speed of its manufacturing process.
At General Instrument, product creation starts within Aspect's component/supplier management software, which pushes parts data into Metaphase's product-data management tool, and then out to an Oracle ERP system that was completed last May. As a result, product data is entered only once. "That's when we began seeing strong return on investment," says Lonnie Gillihan, senior manager for enterprise systems at General Instrument. Previously, the company's engineering, manufacturing, and order-entry systems weren't integrated, and product data was manually entered into each system, leading to errors, he says.
General Instrument is also considering product-configuration tools to help its sales force and manufacturing department ensure that certain product configurations are possible before orders are placed. Early next year, the company also plans to provide its more than 3,000 component suppliers with direct access to product data over the Web using Metaphase's technology.
Solid Foundation
Other companies are also looking to capitalize on the post-ERP boom,whether it means
restructuring, building new systems-or both.
At in-line skate maker Rollerblade Inc., a J.D. Edwards' ERP system became the platform for the company's forecasting, sales-force automation, and data warehousing systems. "ERP is that super-solid foundation, and everything else we build on top of it would crumble if it wasn't hooked into a solid back-office system," says Al Sussman, VP of IT at Rollerblade, in Eden Prairie, Minn.
Without the integrated platform, decision support and data warehousing would not be nearly as effective, Sussman says. "Now we can discover why we had a bad week with one particular product in one particular region," he says.
At Mott's North America, the process of implementing ERP has been a process of discovery, says Catherine Riordan, director of business solutions at the Stamford, Conn., juice maker. The company completed its three-year implementation of SAP's financial, manufacturing, and distribution applications last year. "People start out believing that once you put in your ERP system you're done, but that's not the case," says Riordan. "By putting in ERP, you start to discover all the dusty corners of your business that have to be cleaned up, and that takes time."
Mott's found that it wasn't addressing its field or marketing needs effectively, Riordan says. This led to Web initiatives that push order status, sales, and account information out to field sales people, brokers, and distributors. Distributors, for instance, can now use the Web to check order status, instead of calling a customer-service agent who would then have to search for that information in the R/3 system.
Next up for Mott's is supply-chain management, Riordan says. The company is testing SAP's Advanced Planning and Optimization software for planning production schedules and shipments. "We're always trying to clean up our inefficiencies," she says, "and by the time SAP came out with APO, we were ready for it."
Before companies implement post-ERP applications, it's important that they stabilize their ERP system, according to the Deloitte study. This is the case at Elf Atochem NA Inc., the $2 billion U.S. unit of French oil company Elf Aquitaine. Elf Atochem began its R/3 implementation in 1994, and it's intent on maximizing the benefits of the system before rushing to build applications on top of it, says Robert Rubin, senior VP and CIO. "Our main focus is learning how to use what we have well," he says.
The SAP system handles everything in Elf Atochem's 11 business units, including ordering raw materials, manufacturing, selling, billing, and collecting. The company has implemented add-on packages to improve customer service and plant scheduling, Rubin says-but only after it was determined that there was no alternative.
Real-Life Reengineering
Ultimately, by feeling their way through the initial shock of an ERP implementation-new
business processes, new job roles, new management structures, and new
technologies-companies are transforming themselves. While ERP packages have been criticized
for forcing businesses to conform to software rules, some companies have actually sought that
conformity to force necessary change in their organizations and to make it easier to work with
customers and suppliers.
"This is reengineering for the real world," says reengineering guru Michael Hammer, who participated in developing the Deloitte report, along with research firm Benchmarking Partners Inc. "The most wonderful process design does you no good if you can't implement it, and most will have to be done with packaged software, because writing it from scratch is just not in the cards."
Competitiveness can be improved, Hammer says, by taking advantage of the thousands of different configurations available in ERP systems and by wisely using ERP-generated information. Companies can also take the next step of integrating the back office with the front office, where the sales efforts take place. "Now that we can fill orders, the next challenge is to get the orders right in the first place," he says.
And with the continued post-ERP alignment of IT and business goals, IT organizations have the opportunity to get it right and satisfy not just corporate management, but the company's customers and suppliers as well.
With additional reporting by Jeff Sweat
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