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Two-tier ERP, SaaS beckon companies embarking on ERP consolidation

Manufacturers also face integration decisions once they decide to consolidate multiple ERP systems.

For manufacturers that are tired of operating multiple ERP systems and have decided to start the ERP consolidation process, a world of technology options awaits. They include better integration of systems, replacing them with a single platform and deploying Software as a Service (SaaS) ERP at satellite offices, according to ERP experts.

Most manufacturers -- even small ones -- have multiple operating sites, according to research conducted by Cindy Jutras, principal of Mint Jutras, a Windham, N.H. ERP consultancy. They must carefully evaluate the needs of each site to decide how to architect their ERP setups before choosing applications.

“Before you make the technology choices, you have to define the business application architecture,” said Rajeev Ranjan, associate vice president and delivery head for manufacturing at Infosys, a global consulting and IT services company headquartered in Bangalore, India.

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The most important decisions “are not about the hardware or the software that you use,” said Ranjan. “You have to look at the structure of the organization you’re going to support with ERP.” Begin by looking functionally across divisions and don’t necessarily stop with ERP, he said.

A company might decide, for example, that it wants to do order management on one ERP system for locations A, B and C, with each system rolling up into the corporate ERP for profit and loss accounting. This type of arrangement is known as two-tier ERP. Further, the same company might decide to handle warehouse management separately at each division, since it is difficult to use the same instance for logistics in geographically separated locations. “You have to draw the map, then you can start to apply the technology choices,” Ranjan said.

Comparing single, two and multi-tier ERP

After sketching out this application architecture, the next step for many companies is to define ERP standards. It doesn’t have to mean choosing one system to use across all sites, Jutras was careful to specify.  

The 2011 Mint Jutras ERP Solution Study found that 97% of the top-performing ERP implementations (at companies rated in the top 15% for their results and progress toward goals) have established a corporate-standard ERP system or systems. But these same top performers are 68% less likely to standardize on a single ERP solution, she said. Instead, nearly 30% of the top performers had a multi-tier ERP strategy.

Jutras defines three different approaches to tiered ERP:

  • Single-tier ERP. Here, all business units, divisions or locations use the same ERP. The larger the company, the less practical this option may be.
  • Two-tier ERP. This is where one ERP system is used at the corporate level, generally for back-office financials, and a second platform (often referred to as “operating ERP”) is used for business units. Two-tier ERP is attractive to many companies because it offers business units some flexibility beyond the corporate ERP.
  • Multi-tier ERP. One ERP system runs at corporate with several different ERP platforms and instances for business units, depending on function or location. One of the tiers could incorporate a SaaS ERP system. Venturing into SaaS ERP this way reduces risk when compared with migrating wholesale to SaaS ERP under a single-tier architecture.

Making these decisions can be difficult and time-consuming. After all, the company will likely have to live with the result for at least several years, so many factors must be considered.

Take the single-tier vs. two-tier ERP decision. “Not only do you have to look at whether the different business units and operating divisions are similar or dissimilar, you also have to look at the relationships between them,” Jutras said. If one plant or location feeds components to another plant or division, there will be a lot of interaction between the two.

“The more interaction there is between the different units, the more they need to interoperate from a data standpoint,” Jutras said. In that case, “it will be a lot easier for them all to operate on the same ERP, just feeding up to a corporate general ledger.”

No matter which architecture the company chooses, defining a corporate standard for ERP is a critical success factor. While there is no single best approach to standardization, Ranjan and Jutras emphasize a three-step process that goes a long way: Evaluate the needs of all locations, map out the relationships between them and create a plan that includes integration.

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