Enterprise resource planning (ERP) was born of the need of large companies to manage their resources and operations. In the early stages of ERP almost half a century ago, only multinational corporations could afford the investment in the software and the infrastructure needed to support it. Material requirements planning (MRP), the predecessor of ERP, was used by only a couple hundred companies in 1975, and the number grew to 8,000 in 1981.
Over time, the programming tools evolved, and the commoditization of hardware and the use of the Internet to store data and facilitate remote connections made ERP more accessible. Nowadays even very small companies can acquire an ERP solution for a reasonable price. But ERP is not the same for companies of all sizes. This fact reflects an important reality of the manufacturing sector: medium and large companies face challenges that are very different from those of small enterprises.
There are several conventions on how to determine the size of a company, which can vary by continent (e.g., European versus North American practices), industry, and even institution (e.g., The World Bank versus European Central Bank definitions). Some software vendors make it even more complicated by using subcategories such as lower-midsize and upper-midsize companies.
To have a coherent system for determining company size when we were developing our buyer’s guide for ERP for small businesses, we defined small businesses as being those companies having up to 500 employees and $50 million in revenue. Thus, we will consider medium and large companies to be those enterprises having more than 500 employees and $50 million revenue.
Bigger Is Complicated
One may think that a large manufacturing company just produces many more finished products than a small company in the same industry, and the challenges both companies face are proportional to their size. The truth is that the complexity of a company’s operations increases exponentially relative to its size. Larger companies need to manage not only more inventory, sales transactions, people, etc., but also different software solutions, business entities and multiple levels of management, national and international laws and regulations, local cultures and unwritten rules, etc. The interactions between all parties involved (whether within the company or outside it) are so numerous that managing them becomes extraordinarily difficult.
To add to the complexity, customer behavior and needs are constantly changing, technology is advancing at a very fast pace, and companies keep accumulating amounts of data that, if not managed properly, verge on overwhelming. Like Heraclitus said, “Nothing endures but change,” and no one knows this better than medium and large manufacturers.
Facing the Challenges
To accommodate change without jeopardizing their activities, medium and large companies need to address the following challenges:
• Legacy systems: Many medium and large companies existed when there were no or very few software solutions available. So they used several products, not always integrated, which wasn’t very cost-effective or user friendly, and which generated large amounts of unstructured data. Meanwhile, there are not enough specialists in obsolete technologies available to help address these issues.
• Compliance with laws and regulations: The more a company expands, the more complicated it is to achieve local and international compliance. In manufacturing this is particularly important, since it can affect all major activities, from procurement and production to distribution and retail, asset management, and human resources.
• Business process (re)engineering: The ever-changing business environment forces medium and large companies to adapt, but they can only do it by defining new workflows and procedures and restructuring existing ones. The larger the company, the more people, assets, and partners will be involved in any change dictated by the market, which makes the process of change very expensive and resource-consuming—which only exacerbates the basic logistical complexity of defining, testing, and implementing new business processes across multiple business units.
• Mergers and acquisitions: Besides expanding their activities, companies can grow through mergers and acquisitions. Depending on the size of the companies involved, the process can be complicated by the need to integrate the operations of different departments, plants, or sites that often operate in different languages and regions and use different business processes and software solutions. Thus, any unresolved issues during a merger or acquisition can have a negative impact on all entities involved.
• Offshoring and re-shoring: Globalization and the need to reduce costs have forced some companies to move some or all of their production facilities from one country to another. When headquarters and subsidiaries or plants are on different continents, activities like quality control and short delivery time can be hard to manage.
• IT infrastructure: Despite the potential advantages of software-as-a-service (SaaS) solutions, which require neither hardware nor IT personnel, medium and large manufacturers oftentimes use a combination of SaaS and on-premise solutions (if not on-premise only). Cloud computing for large businesses has several limitations that are not yet resolved.
• Social media and collaboration: The advent of social media and collaboration does not directly affect the core activities of manufacturing companies, but social tools can be an amazing source of feedback (internal and external) for customer service and product development. Collaboration with business partners can increase efficiency, but privacy issues may present important concerns.
Everywhere change is constant, but medium and large manufacturing companies simply do not have the flexibility to adapt quickly, and they may suffer great losses if they take too long to respond. The above-mentioned challenges only compound the usual difficulties in creating strategies to remain relevant, efficient, and profitable.
This post is the first in a series describing how ERP vendors can help medium and large manufacturing companies embrace change. Each of the challenges mentioned above will be addressed in more detail in future posts. We will also be publishing a buyer’s guide for medium and large ERP later this year, containing valuable information about ERP software solutions to help face these challenges.
Very interesting information about ERP. Yet, it is more of the same.
Why don’t research ERP contract models? What models will be available in the future? Just an example, will licenses remain a winning model or pay-per-use or services will diplace the model?