Integrating Strategic Suppliers Using a Two-Tier ERP Model

Manufacturers increasingly need to integrate subsidiaries with diverse business models, yet still ensure their autonomy.

Manufacturers often acquire a small strategic supplier to ensure a ready supply of components at the right price. They might also do so to gain access to an emerging technology or perhaps to reduce exposure to price fluctuations or to own a critical part of their supply chain. However, despite such an acquisition, the manufacturer may not plan to openly compete in the market of the acquired supplier. For example, Apple recently acquired a flash memory design firm to secure access to a proprietary technology that increases the performance of flash memory drives, though Apple is not a supplier in the flash memory market.

Similarly, sometimes a company may set up a separate branch in a geography that houses an adjacent industry cluster to bring new ideas back into the parent company. European pharmaceutical giants have done this by establishing subsidiaries in California or Boston, close to new developments in fields like biogenetic engineering, to foster and disseminate innovation within their organization.

Such diverse operations force a company to grapple with a complex management issue: how to integrate such a diverse business into the company, yet still ensure their autonomy, so they continue to flourish and innovate. How should a balance between control, visibility and independence be successfully executed?

For example, consider a scenario when a utility acquires a power generation company to get predictable access to a power source. The core competency of a power generation company is asset management -- knowing how to extract maximum value from its current infrastructure/capacity. By contrast, a utility understands billing, repair and customer management processes very well.

Setting up independent subsidiaries is a natural way to organize in such scenarios -- the acquirer can get the leverage from its recent acquisition, while keeping the acquired company independent enough to retain the executive talent and continue to deploy different processes and systems to be competitive and innovative in its own market. Each has to work independently, but be able to take advantage of the strength of the other in order to maximize the leverage from such a strategy.

Managing Subsidiaries

In most cases, when acquiring a company with a different core competency, the acquirer can't take a completely hands-off approach to manage these subsidiaries. There are three reasons for this:

1. It is difficult to exploit the benefits of the acquisition/new operation by taking a holding company approach. For example, a manufacturer that acquires a strategic supplier wants to ensure tighter collaboration in product development and delivery processes. A hands-off approach would not support the acquisition objectives.

2. Selling a product isn't the beginning of a company's relationship with its customers. The relationship starts when the customer first becomes aware of the brand. This relationship does not end at the point of sale, because a customer's every interaction with the product is an opportunity to foster their loyalty or lose their future business. Hence an organization must ensure that its subsidiaries provide a consistent customer experience through the lifecycle. A complete hands-off approach makes it challenging to meet this objective.

3. In a predictable (deterministic) market, autonomy of subsidiaries from the main business can ensure good decision making and accountability to drive financial results. However, as the market conditions become more uncertain and dynamic (stochastic), closer collaboration between various business units to find new sources of competitive advantage becomes more important. For example, closer collaboration between Johnson & Johnson's diagnostics and pharmaceutical subsidiaries, historically run as autonomous businesses, was a result of significant structural changes taking place in the industry.

How should such a balance between control/visibility and autonomy be implemented? The subsidiary business is still different enough that it needs enough autonomy to succeed and grow. However, business processes are implemented on top of business systems. As a result, a key question becomes what should be the relationship between corporate and subsidiary business systems in such environments?

The governance model for such subsidiaries often calls for more autonomy in decision making and execution. In addition, the diverse business model and industry requirements of these subsidiaries dictate that they have different business processes from the corporate in many functional areas. The IT budgets at many of these subsidiaries are also much smaller and their need for more nimble systems is often more acute.

The Two-Tier ERP Model

As a result of these factors, implementing the corporate business system at these subsidiaries may not be a viable option. Such a deployment model is called a two-tier ERP model, where corporate and subsidiaries have different ERP systems by design. Once a two-tier ERP model is established, then systems that meet the budget, as well as functional and regulatory requirements of the subsidiary, can be shortlisted.

However, deciding to choose a two-tier ERP model is not enough -- in the examples listed above, the resources and activities across the subsidiary operations also need to be coordinated. For example, the core business and an autonomous subsidiary may still want to coordinate purchasing activities to benefit from lower purchasing prices, better payment terms, and higher quality levels that corporate has negotiated and which they would not be able to negotiate themselves.

Corporate always wants the capability to easily and accurately roll-up key information from subsidiaries to streamline planning and operations. Corporate management also wants adequate visibility into key operational metrics of the subsidiaries, to see if subsidiaries are executing in accordance with their operational plan. Finally, corporate wants to ensure adequate financial or regulatory controls exist at the subsidiaries, so any unpleasant surprises in the future can be avoided. As a result, only that subsidiary system should be selected that supports deep integration with the headquarters system, while enabling it to be autonomous in its business processes and decision making and supporting its business requirements and budget constraints.

In summary, companies increasingly need to integrate subsidiaries with diverse business models, yet still ensure their autonomy. In doing so, they have to ensure a fine balance between control, visibility and independence for these subsidiaries. A well devised two-tier ERP strategy can help them execute this balance. Key is to ensure that the shortlisted systems support the subsidiary's business requirements, provide them the flexibility to have different and agile processes to meet their industry and local market requirements, and meet smaller IT budgets. However, it is also important that the shortlisted systems also support corporate's need for better control and visibility into these subsidiaries.

Jennifer Schulze is senior director of solutions marketing in the Global Ecosystems & Channels Solution Marketing Group at SAP.

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