You are responsible for corporate operations and procurement at the headquarters of a Fortune 1000 company. Your team has done an outstanding job selecting preferred suppliers, negotiating prices and volume discounts, and setting quality and service targets. You now want to ensure that your hard work is paying off and that the pricing, terms and service level metrics defined by your team are being followed across the entire company, including smaller subsidiaries, regardless of their location. In short, you want headquarters to have the visibility and compliance it needs to optimize the overall performance of the business. Similarly you want subsidiaries to benefit from lower purchasing prices, better payment terms, and higher quality levels that they would not be able to negotiate themselves.
Until now, such a degree of visibility and compliance at the headquarters level has been a challenge. Your subsidiaries are running completely different enterprise systems that are not connected to the headquarter ERP system and they follow different purchasing processes that do not map to your purchasing process at headquarters. This gap makes it challenging for your subsidiaries to leverage the higher quality suppliers, terms and conditions of the contracts that you have negotiated. Furthermore, some of the communication about preferred supplier lists and negotiated contract terms falls through the cracks when spreadsheets and emails are used to coordinate with the subsidiaries. There is now an opportunity to address this issue and fully leverage the headquarters' suppler arrangements. With legacy systems at some subsidiaries in need of replacement, you can help subsidiaries select a system that best meets their business and budget requirements, yet also addresses headquarters' need for visibility, compliance and coordination. But, how do you help them frame the right selection criteria for a new system?
Multiple options are available, each with advantages and disadvantages. In the end, your governance model, together with the business requirements of the subsidiaries, should drive the decision. Below are three options that you may consider:
Option 1 -- Deploy the Same ERP System Across the Company
Under this option, the corporate ERP system is deployed at every business unit and subsidiary, ensuring that the same processes and metrics are enforced across the entire company. In our procurement example, every stakeholder would use the agreed-upon procurement terms, do business only with approved suppliers, and measure compliance using the same set of rules. Such an approach would give headquarters clear visibility and control over the procurement process.
While some companies have implemented such an approach, especially if their business is homogeneous across the globe, this option of deploying a corporate ERP system in smaller subsidiaries or divisions comes with a set of steep challenges. The process complexity and workflows in a small, autonomous subsidiary are typically very different from those of headquarters or a large division. As a result:
- Smaller subsidiaries are likely to get smothered by process overload
- The cost of implementing the corporate ERP system may significantly exceed the planned budget and skills of the smaller subsidiary
- The corporate ERP system may have to be heavily customized to meet the unique industry, functional and compliance requirements of the smaller subsidiaries
Hence, in many business environments, such an option may not be viable. Instead, some companies opt for a two-tier ERP approach -- the corporate ERP system is deployed at headquarters and at larger divisions, while a different ERP system that is simpler, easier to use, and better suited to the local financial and regulatory requirements and line of business needs is implemented at the smaller subsidiaries.
Option 2 -- Deploy a Two Tier ERP approach with Simple Data Tntegration between Headquarters and Subsidiaries
In this option, the company implements a corporate ERP system at headquarters and larger divisions, a different ERP system at smaller subsidiaries, and a layer of simple transactional data integration (or rollup) between the two ERP systems. The most popular scenario under this option is rollup of financial data from the subsidiary system to the corporate ERP system to enable financial consolidation for fiduciary and management reporting at headquarters. This example is often seen in an environment where the subsidiary runs its operations at an arm's length from headquarters or when headquarters is a holding company with several independent and autonomous entities, each with its own business model. In such scenarios, the role of the integration between the two ERP systems is to enable financial consolidation of the information from the subsidiary to headquarters. Any subsidiary ERP system that supports roll-up level data integration with the corporate ERP system will meet headquarters requirements. However, this approach is not sufficient if headquarters and the subsidiary need to collaborate or coordinate their activities more closely.
Option 3 -- Deploy a Two-tier ERP Approach with Process Integration Between Headquarters and Subsidiaries
With this option, the company implements a two-tier ERP model, but the integration between the two ERP systems tiers goes beyond simple data consolidation discussed in the previous section. It integrates business processes, such as Procurement, across the two systems. This approach is ideal for scenarios where headquarters and subsidiaries need to coordinate activities or collaborate with each other. For example, in the scenario defined at the beginning of the article, where headquarters and subsidiaries want to coordinate purchasing activities, corporate purchasing negotiates a contract with a global supplier and defines the contract terms in the corporate ERP system.
By integrating the two systems, the vendor terms negotiated by headquarters are available to the subsidiary. In this scenario, the subsidiary has the autonomy to create a purchase order in its own system and use its own processes for approving requisitions and receiving goods, but is able to leverage the contractual terms negotiated by headquarters. As a result, the subsidiary typically benefits from lower prices and more timely delivery. Additionally, when the purchasing transaction is completed in the subsidiary ERP system, the procurement information is automatically updated in the ERP system at headquarters, giving corporate purchasing visibility into how well their negotiated contract is performing and if the contract needs to be re-negotiated to support higher than planned volume or different service levels. Furthermore, if corporate purchasing renegotiates the contract at any time, the new terms are automatically visible to the subsidiary as a result of the integration between the two ERP systems. (see Figure 1)
In corporate governance models where headquarters and subsidiaries collaborate around activities such as budget planning or supply/demand forecasting, have common functions, such as shared finance or HR services, or have common processes which require coordination, such as in the procurement example just discussed, Option 3 with process integration between headquarters and subsidiaries is the best way to implement a two-tier ERP model.
Summary and Recommendation
As we have seen in this article, there are several approaches for providing the visibility headquarters needs to coordinate, and collaborate with subsidiaries. Option 1, a single ERP system 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. Option 2 supports light data integration between the two ERP systems, enabling you to effectively implement a two-tier ERP model for subsidiaries that operate very independently or only need to provide financial data for consolidation to headquarters. However, if some level of cooperation between headquarters and subsidiaries is needed in their supply chain operations, shared services or collaborative planning activities, then Option 3, two-tier ERP with process level integration, is the best approach. This option gives you the best of all worlds: subsidiaries get a system that meets their business and budget requirements and provides them the flexibility to innovate and compete effectively in their local markets, while meeting the compliance and coordination requirements of headquarters.
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.
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