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Reliance upon ERP systems alone could be damaging your growth ambitions

Posted: 11/04/2016 - 19:59

The world is growing increasingly complex. As such, agile capabilities and the ability to quickly adapt to changes in global environments are becoming more and more important. Events like the rise of extremist terror organisations and the dissemination of technology across the world have significantly changed the way in which enterprises interact. Businesses are quickly waking up to the rising demands placed upon them by this new international marketplace. However, too often changes caused by worldwide events catch organisations off guard.

For instance, the ‘Brexit’ vote for the UK to leave the European Union earlier this year was arguably one of the most significant business risks of the past five years. That being said, many companies were left scrabbling after the result. The possibility of leaving the single market, a ‘hard Brexit’, has many worried about their ability to sustain their current supply chains across the continent competitively. It is fair to say that plenty of British businesses simply hadn’t seen this coming and are concerned about their ability to thrive after leaving the EU.

Success in situations like Brexit requires robust scenario planning, the ability to respond quickly to changes and the capability to deal with an ever-changing list of suppliers and business partners. These circumstances are especially complicated, and therefore require complex decisions and trade-offs to be made quickly, accurately and dependably. For many modern businesses, this level of agility is not feasible; their business planning tools are simply not up to the job.

For many companies, the default business planning tools are Enterprise Resource Planning (ERP) systems. These tools can cover functions like forecasting, product planning, distribution planning and customer order processing, as well as a multitude of other business areas from finance to HR. ERP systems have been on the market for a number of years now, with many organisations having some form of ERP system as part of their legacy technology stack.

ERP systems tend to plan in a linear fashion. They take forecasts comparing stock on hand, safety stock parameters, lead times and prorating the demand through the material structure (BOM). However, if there are multiple ways to fulfil demand (several production sites with alternate materials and multiple routings, for example), ERP systems typically cannot compare and evaluate all these options. A desire to create and analyse scenarios, such as high/low sales forecasts or modelling a variety of interruption effects on your supply chains, just can’t be achieved with ERP systems. The ability to optimise a supply chain for the lowest cost, improved margin, increased customer service and lowest inventory are key capabilities that traditional ERP systems are unable to realise.

If supply routes need to change following disaster, or old trade agreements can no longer direct freight transport, businesses leaning on ERP systems can find themselves on the back foot. In our experience, the inflexible planning abilities of ERP and lack of advanced functionality mean that many planners use spreadsheets as a sticking plaster. Of course, this brings issues in robustness, visibility and a time burden on the planner. The process is time-consuming and limits the types and number of situations that can be explored. Reliance upon traditional ERP and ‘secret’ spreadsheets as planning tools prevent businesses from rising to the challenges of today’s marketplaces and successfully taking advantage of them. Just imagine the shareholders’ surprise if they discover multi-billion supply chains are reliant on such poor tools!

All in all, the use of ERP systems can result in significantly increased capital and service costs in the case of any changes to the supply chain status quo. Crimson & Co’s recent research into the planning and scheduling market found that over two-thirds of those surveyed still relied upon ERP and spreadsheet systems. We found this truly shocking. The world has moved far beyond the capacity of these tools to effectively plan and deliver robust supply chain strategies, seriously diminishing a company’s ability to react quickly and with confidence to market changes.

Evidently, there is a need for businesses to update their planning tools to erase these costs and remain competitive in the global market. Those using ERP systems or similar are less able to innovate and improve their supply chain processes, therefore falling behind more reactive and agile businesses supported by more flexible planning tools. With growing global risks, evolving supplier networks and economic difficulties in key markets, businesses that do not take advantage of Advanced Planning & Scheduling (APS) systems risk increased costs with limited flexibility to respond to changing market conditions.

APS systems usually sit above ERP systems and, from a planning perspective, the ERP system becomes a system of record where the decisions made in the APS system are realised. They also offer many significant advantages to planning via ERP systems: creating and analysing scenarios, optimising complex supply chains and providing a robust, visible planning system amongst many others.

In short, businesses supported by APS systems are more able to react to changing global environments since they have greater information, oversight and options available to them. Good planning cannot simply consist of linking up supply and demand anymore, as ERP systems have done for some time now. Supply chains are invariable more complex and unpredictable; APS systems are perhaps the best solution available to properly handle this level of intricacy and to enable businesses to derive a competitive advantage from their supply chains. Many APS systems now offer many deployment and licensing models that mean even organisations with lower complexity supply chains can usually develop compelling business cases with a two-to-three-year return on investment.

Our previously mentioned research also looked at the ways in which businesses utilising APS systems were leveraging its impact across their enterprises. The findings showed that an effective APS system could result in a 20% reduction in working capital; 5% increase in service levels; 6% reduction in logistics costs; and 3% reduction in the cost of goods sold. The prospect of reduced costs while boosting service ought not to be sniffed at!

There is a clear incentive therefore for businesses to adopt a robust APS system. In most situations, they cut costs across the organisation while adding value by aligning the supply chain to enable and achieve business strategies.


About the Author Eddie Groom is Senior Consultant at Crimson & Co.

About The Author

Outsource Magazine provides unrivaled content for the opinion-formers and decision-makers at the heart of the global sourcing community. This indispensable resource for news, views, analysis and thought leadership was launched in 2005 and acquired by Sourcing Industry Group (SIG) in 2016. Outsource columnists and contributors are thought leaders in the global sourcing community and provide insight on challenges and opportunities in the industry today.