Do Non Manufacturing Distribution Companies Require ERP?

Executive Summary

  • Background on OEMs that do Not Need to Explode the BOM
  • Does A Company That Performs No Manufacturing and No Distribution Require an ERP System?
  • Alternate Designs to Exploding the BOM with MRP.
  • If MRP is Required, Must it Come From an ERP System?

Introduction

In this article, we investigated what happens when an OEM performs no manufacturing and an alternative model to the convention design — where the OEM runs MRP and explodes the BOM. In one alternative, MRP is run by the OEM, but only for the well-finished level. In this article we take this thought exercise to one following level — and this third scenario is where the OEM also performs no distribution. In fact, many high-tech OEMs outsource not only manufacturing but distribution as well. However, most consulting companies follow a standard policy of recommending ERP implementations to their clients.

Why?

This is done not because there is any evidence that ERP systems provide a financial return (they don’t as is explained in the SCM Focus Press book The Real Story Behind ERP: Separating Fact from Fiction.)

Consulting doesn’t know or care much what works for their clients but are intensively driven to maximize their revenues — which means software categories which maximize the revenues of consulting companies will be recommended. ERP provides a negative return on investment, even for enterprises that have most of the business processes covered by ERP systems, but can be especially poor values for companies that cannot use ERP systems for much more of a minority of what they do because they do not fit the ERP cookie cutter design. To see why this is the case, let us look at the application components of ERP systems:

  1. Sales
  2. Materials Management/Distribution
  3. Production Planning
  4. Finance and Controlling

For many high-tech OEMs they, as we have just discussed do no production or distribution, so they have no use for two of the standard application components of any ERP system. As for the Sales component, this is an entertaining area.

How About Sales and Finance?

What is happening is that CRM is encroaching on the standard sales module of applications like SAP and Oracle. Increasingly solutions like Salesforce can provide most all of the functions of the sales module of ERP systems — and they are far easier to use, and allow a true connection to the sales force. Specific best of breed applications for sophisticated functionality such as pricing can be added at a higher functionality level than anything offered by the major ERP vendors. This leaves the finance module – which any company requires. The finance module can be acquired with a system such as Financial Force, which is pre-integrated with Salesforce and is native to the Force platform, or Intacct, which also provides easy to integrate stand-alone finance application, and which is capable of scaling to the accounting needs of even large companies. However, the original argument, or should I say one of the major original reasons for ERP system acquisition was that one could use all of the modules of an ERP system and they have been fully integrated (sit on the same database, no interfaces, etc..) However, while this may apply to many traditional companies – it in no way applies to many other businesses that do not perform all the traditional functions of a manufacturing company. Here is why:

  1. The ERP system may be integrated, but these high-tech OEMs have little use for the set of functionality that ERP systems offer.
  2. ERP systems are a significant expense, much larger than anyone originally projected. It is laughable now, but ERP was originally planned to decrease IT costs. This is probably the point where anyone who has worked in ERP sales will want to stop reading. This is because promoters of ERP systems have been proven wrong on every one of the major logics that were used to justify ERP (as is covered in great detail the SCM Focus Press book The Real Story Behind ERP: Separating Fact from Fiction). And this applies in particular to Tier 1 ERP vendors and becomes less and less true, and one moves through the Tier 2 and least true as one moves to cloud-based ERP.

Alternate Designs to Exploding the BOM with MRP

  1. The Alternative Design 1: MRP at Finished Good Level at OEM

The Benefits of the Alternative Design

The OEM gets a much easier and lower cost to maintain the system, and the complexity manufacturing is moved to where it should reside, at the CM as they are planning the production. Some companies attempt to prepare their CM/subcontract suppliers actively. This can work when the OEM is a sizable part of the demand of the CM/subcontractor (and there are still complications in this – a detailed explanation of the type of software that can relatively easily handle this requirement is covered in the SCM Focus Press book  SuperPlant: Creating a Nimble Manufacturing Enterprise with Adaptive Planning Software) if one represents only a small fraction of the demand for a CM/subcontractor capacity, it makes little sense to model this plant – in fact, it is highly unlikely the CM/contractor would be willing to share capacity information – it is simply not worth their time.

If MRP is Required, Must it Come From an ERP System?

In Alternative Design 1 above, MRP is still performed for the well-finished level. Wouldn’t an ERP system be required to run MRP? Actually no. MRP functionality can be purchased at low cost compared to a full ERP system. Demand Works Smoothie runs MRP and does so with overall functionality and usability, which is superior to any ERP system that SCM Focus has tested – which includes all Tier 1, and several Tier 2 as well as multiple clouds based ERP systems. More on this topic is covered in detail in the article Why Not All MRP Systems Are Created Equal.

Conclusion

The answer is that for many companies that do no manufacturing or distribution even, do not require an ERP system. Instead, they can combine much high value best of breed applications at a fraction of the cost and long-term total cost of ownership, while increasing their flexibility. More on this topic will follow at this site, as we will release portions of insights from upcoming books on these subjects.

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References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

http://www.sciencedirect.com/science/article/pii/0272696381900310 MRP. Accessed October 18, 2013. http://en.wikipedia.org/wiki/Material_requirements_planning