What Role Does Enterprise Resource Planning Play In Supporting Globalization?

ERP as an enabler

Companies world-wide are feeling the effects of global competition. Mergers and acquisitions, product line convergence, globalization and commoditization are affecting many industries. North American and European companies have been challenged by the introduction of lower priced products coming into their markets from countries with inexpensive labor, causing the trend in recent years toward Low Cost Country Sourcing (LCCS) in turn, introducing a higher level of complexity into the supply chain. In the meantime, some of these offshore companies, having grasped a foothold in more developed market share, have moved operations to these markets (e.g., the U.S.), yet are still managing to keep costs and prices low.

In order to grow and be profitable, today's companies must find a way to compete in the global economy.

Findings from the Aberdeen Group’s Globalization Strategies: ERP as an Enabler benchmark report show that companies are indeed expanding their business in all areas of the supply chain: Sourcing of raw materials or components takes the lead, with 73% of companies looking outside their borders, while 71% are selling their products and services to international markets. These two aspects represent the beginning and end of the supply chain, and are areas with a relatively low cost of entry. Establishing operating locations in foreign countries, on the other hand, can represent considerable investment both in terms of time and cost; yet 65% of respondents already have a global operating presence.

Due to the introduction of low cost competition, many companies are globalizing in order to exploit low cost sources of material and labor and thereby remain relevant in the market. Others are looking to expand into new markets and opportunities in order to increase market share.

Shared Services as a Globalization Strategy

How are companies dealing with the increased demands of a global supply chain? As operating locations proliferate, so do costs, and control can slip away. Many companies are addressing these issues by employing shared services for their major business operations. Shared services can eliminate redundancy and help to automate and reduce tasks. The centralized control also ensures that operations are consistent across all locations.

Many functions traditionally managed by Enterprise Resource Planning implementations are now being centralized as shared services. Finance functions in particular are most often shared, with 47% of respondents reporting that they use shared services for their accounts payable functions, 40% for accounts receivable, and 36% for planning and budgeting. However, without common infrastructure and centralized data management solutions, each operating location could be maintaining data in disparate applications, and duplicating efforts in order to record the same data into the corporate shared system. This leads to problems with data security and integration. If corporate functions like finance are shared but IT is not, then everybody will have a problem with interoperability.

Not surprisingly, IT operations are most commonly run as a shared service, and also act as the backbone for most successful shared services. Centralized IT functions lead to a common infrastructure and possibly common applications across all operating locations. Decisions are made with a broader view, as opposed to only considering the needs of each individual plant or operational silo.

Enabling Shared Services With Standardized ERP

When ERP functions are being shared, an obvious obstacle is the number of disparate implementations that must be integrated. Aberdeen Group’s 2008 ERP in Manufacturing benchmark report found that companies have an average of 2.0 ERP implementations (more for larger companies), often because divisions are allowed to make their own ERP decisions or as a result of mergers and acquisitions. The Globalization Strategies survey found that "best-in-class" companies are 14% more likely than "industry average" and 2.1-times as likely as "laggard" companies to standardize their ERP implementation across the enterprise, a capability which becomes more critical as the number of operational locations grows along with company size. A single ERP package, or a single ERP instance even more so, can simplify the operation of shared services. However, the level of autonomy and heterogeneity between operating locations will impact the extent to which standardization is possible. In these cases, harmonizing charts of accounts, product, customers, and supplier codes will better enable interoperability and consolidated reporting across the enterprise.

About the Author

Cindy Jutras, Vice President & Group Director, Aberdeen Group, has over 30 years of business experience in manufacturing, ERP and supply chain management. She oversees research programs, products and services, as well as client development related to manufacturing for the Aberdeen Group.