Enterprise resource planning (ERP) systems are invaluable tools for consolidating and managing many critical, albeit disparate business processes. But as the Hershey Co. learned, some processes are just too difficult for an ERP system to manage, and are better suited for outsourcing.
The global candy company learned the hard way that non-traditional approaches to complex warehousing weren't something its ERP could handle. To deal with the tremendous build-up of inventory that occurred each year around the holiday rush, Hershey would store candy inventory any where it could find capacity. The extra storage included rented warehouse space and sometimes even spares rooms within the factory itself.
Because these rooms weren't recorded as storage points in the system, the ERP system didn't have visibility into these ad hoc storage areas. While the old methodology worked in a more manual system, it didn't meet the discipline required when using an ERP system.
Managing warehouse and logistics operations in-house cost Hershey $150 million in lost sales and damaging customer relations. Outsourcing these operations might have saved its holiday season.
Outsourcing: Delivering ROI at a Fraction of the Cost
The concept of an ERP system to manage business processes can certainly be appealing. After all, the promise of total data integration to achieve global visibility into all operations is the holy grail of IT and executive management.
But companies like Hershey are increasingly finding chinks in the ERP armor. The very nature of these systems requires a rigidity and standardization that is counter to the realities in which today's supply chains operate.
The bottom line: as shown by Hershey's experience, supply chain flexibility can be constrained by the implementation of a mainstream ERP warehouse management or transportation management system.
To avoid the time, resource and capital investments required to deploy these non-core ERP software modules, many manufacturers are instead outsourcing warehouse, transportation and supply chain functions. By turning to third-party logistics providers (3PLs), companies are able to benefit from best-in-class capabilities that fully integrate with core ERP systems at a fraction of the investment.
Build or Buy?
There are several important questions companies need to ask themselves when evaluating the possibility of outsourcing supply chain functions in lieu of a complex ERP implementation.
- What are our core competencies?
- How complex are our logistics needs?
- How will our business change or evolve in the next 6-12 months?
Companies must first consider whether activities like logistics and warehouse management are, or should be, a core competency of a business. If not, it might be a candidate for outsourcing.
Companies also need to consider their logistical and business needs as they evaluate potential partners. If they experience high transaction volumes, complex cartonization and complex load configuration due to variant box sizes and weights, demonstrated ability to scale is critical. If they expect global expansion and new product lines, partners and customer requirements, they'll also require high levels of flexibility to manage changes and advanced information systems to track seamlessly with ERP systems.
Reducing Risk, Increasing Performance
Outsourcing can deliver results in a fraction of the time -- and avoid the risk of managing activities in-house.
Like any strategic initiative, outsourcing takes comprehensive preparation, but the benefits should far outweigh the investment.
Outsourcing warehousing and logistics allows companies to:
- Ensure the flow of goods throughout the implementation
- Reduce risk of operational disruptions
- Maintain high levels of customer service
- Leverage world-class operations to expand into new markets
- Manage seasonal spikes more efficiently
ERP's ability to exchange data with other systems, including those from outsourced functions, and report the results in a consistent manner allows companies to have the best of both worlds: outsourcing to gain best-of-breed expertise that meets today's need for flexibility and the ability to integrate critical data into an ERP system that is the backbone of a world-class business process.
Hernan Vera is the Group Director of Marketing Supply Chain Solutions at Ryder System, Inc. Celebrating its 75th anniversary in November, Ryder System, Inc. is a provider of leading-edge transportation, logistics and supply chain management solutions. www.Ryder.com.
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