The Battle Between ERP and Best-of-Breed Vendors
Despite implementation hurdles, broken budgets, and highly publicized missteps, enterprise resource planning (ERP) systems are the IT centerpiece in most large companies. Their ability to offer packaged integration of financials, human resources, and manufacturing has made these technology titans the core enterprise asset for many of the worlds largest corporations.
Now, however, many companies are looking to acquire additional functional solutions from their core ERP vendor thereby capturing the advantages of simpler integration, less user training, fewer vendor relationships, and support hassles, as well as lower total cost of ownership in most cases. Buoyed by large customer bases and predictable maintenance revenue streams, ERP vendors have responded to this need by investing extensively to improve the reach and functionality of their solutions. The net effect is that the footprint of ERP is expanding. As a result, supply chain professionals are faced with new alternatives and opportunities in their quest for high performance.
A New Paradigm
The relationship between supply chain mastery and an organizations bottom line is becoming more tangible. Accenture, together with INSEAD and Stanford University, recently conducted a research initiative that revealed the market cap compound average growth rate of supply chain leaders (defined as companies with exceptionally high inventory turns, low cost of goods sold, and high return on assets) is as much as 26 percentage points higher than their industries average growth rate. Put another way, supply chain effectiveness is increasingly recognized as a direct contributor to financial performance. For this reason, a growing number of companies are positioning the supply chain as a strategic asset and a worthy recipient of new technology investments.
As supply chain management grows in importance and ERP vendors move aggressively into this space, operations professionals need to explore the potential of extending their ERP assets, and comparing that promise to the offerings of best-of-breed vendors. After all, many best-of-breed niche vendors are superior in cutting-edge innovation and penetration of key vertical markets.
Following are some of the functional battlefields upon which ERP vendors are challenging the best of breeds. Each area represents a key component of supply chain management one where ERP vendors are seeking to force a decision that weighs not only feature/function, but also the value of attaching to the core ERP enterprise asset.
Supplier Relationship Management
Supplier relationship management (SRM) is an evolving solution set that encompasses analytics, transactional discipline, strategic sourcing, and supplier management. From paper clips to power turbines, this solution seeks to control and reduce a companys total expenditures.
During the past decade, best-of-breed niche solution providers have targeted various areas of procurement. For example, Ariba offers enterprise e-procurement tools that help enforce enterprise compliance for the procurement of indirect materials. Other vendors, such as Frictionless Commerce, have introduced e-auction technologies that enable companies to execute Web-based sourcing events that expand participants horizons from the paper-based few to the Internet-enabled many.
But ERP vendors are closing the functionality gap with products geared to optimizing the value of their clients existing enterprise applications. For example, companies ownership of enterprise data enables ERP vendors to aggregate enterprise spend and provide comprehensive analytics. Enterprise system providers, too, have made recent strides in auction technology. In the marketplace, we also are seeing the growth of ERP portal solutions that could help make ERP vendors the preferred choice for supplier-portal and supplier- management applications.
Of course, best-of-breed vendors are not standing still, as witnessed by Aribas recent purchase of FreeMarkets. For example, bestof- breed vendors are looking for ways to combine e-procurement and sourcing technology with professional services and category-spend expertise. In this way, they hope to extend their reach and counter ERP vendors expansion into supplier relationship management.
Product Lifecycle Management
Product lifecycle management (PLM) seeks to create a single enterprise repository for all product data. Its goal is a united repository that spans research and development, sales and marketing, engineering, procurement, manufacturing, and aftermarket sales and support.
Best-of-breed vendors PTC and MatrixOne gained early market share by introducing Web-based collaborative capabilities for product data management (PDM), the data repository forerunner to PLM that focuses on engineering and product development. Now, however, these vendors are moving into the enterprise application space by offering extended workflow capabilities, collaborative design environments, and Web-based vault architectures.
ERP vendors are approaching PLM from the opposite direction. Leveraging their ownership of financial and manufacturing data, they have invested in collaborative PDM development and expanded their workflow offerings. ERP sales teams now call on IT decision makers in engineering and product development, with the promise of faster engineering change orders and increased access to enterprise financial data. As the PLM market matures, both ERP and best-of-breed vendors are building solutions in portfolio management, new product introduction, collaborative product development, and direct material sourcing.
Supply Chain Planning
The power of advanced planning algorithms and low-cost computing fueled dramatic growth in the supply chain planning market throughout the 1990s. Best-ofbreed vendors i2 Technologies and Manugistics turned the B2B promise of extended supply chain optimization into record-breaking software license sales and soaring stock valuations. Since that time, the new economy bubble has burst and many of the largesuite, multimillion-dollar software contracts have evaporated. However, the use of advanced planning solutions to forecast demand, manage inventory, optimize production capacities, and improve customer service has only increased.
As the supply chain planning market exploded in the late 1990s, ERP vendors moved quickly to build relevant capabilities and introduce competitive offerings. Early announcements of ERP/best-of-breed vendor alliances quickly dissolved, as ERP vendors preferred working solo. Toward this end, they first introduced demand-planning applications, then supply chain planning, and finally detailed production planning.
In net, the battle has moved from planning engine functionality to its present industry focus. Best-of-breed vendors have opted to stake claims in specific target markets, and now focus primarily on vertical expertise and prepackaged templates.
Service Management
Many product companies now derive more profits from service than they do from new product sales. In the automotive industry, for example, aftersale services and parts account for more than 50 percent of the average automobile dealers profits. Across all manufacturing companies, aftersale services and parts have been shown to contribute approximately 25 percent of all revenue, but 40 to 50 percent of all profits. The net effect is that many companies are beginning to regard initial product sales as positioning opportunities for pull-through sales and services.
In response, niche vendors have developed tools to help companies support post-sale service delivery and maximize the potential profitability of post-sale services. As shown in Figure 1, the service-focused supply chains served by these tools can be significantly more complex than traditional manufacturing supply chains. This is because their scope includes more extensive information and product flows, as well as the provision of hands-on, aftersale service. In addition, spare parts (the movement of which is often sporadic and slow) generally follow demand curves that are different from traditional parts. Effective service management tools are therefore designed to help companies:
Develop forecasts for uneven and slow-moving parts (e.g., considering parts mean time between failures, documenting the installed base and product use at the customer level, and assessing the potential for upgrades and substitutions); Optimize inventory levels, budgets, and customer service targets; Procure and source service parts; Develop reverse logistics approaches orchestrating the movement of repair items from the end user to a service center, and tracking items handled by different service providers during the returns process; and Forecast returns and determine disposition of returned assets using precise cost and service-level targets to guide decisions.
Although best-of-breed vendors pioneered niche solutions for many of the above capabilities, enterprise resource planning companies now view service management as a ripe target for future expansion. Leveraging ownership of enterprise data including inventory management, purchasing, plant maintenance and order management, and fulfillment ERP vendors have moved to encapsulate their offerings and produce specialized service management functionalities. These include field dispatch and service, warranty management and repair, and demand forecasting for sporadic and slow-moving parts (as evidenced by SAPs co-development initiative with Ford and Caterpillar Logistics).
Let the Business Case Decide
The team of Accenture, INSEAD, and Stanford University researchers also concluded that the most common reason for supply chain project failures is an inability to make technology work as promised. In this era when the functionality gap between the offerings of ERP and niche vendors is tightening how can supply chain professionals make the right technology decisions? On one hand, ERP vendors have built out their competitive supply chain offerings, and thus have the advantage of effectively leveraging a clients core enterprise asset with promises of tighter, simpler integration and support, and the potential for lower cost of ownership. Alternatively, best-of-breed vendors continue to invest in core competencies and (as they always have) stretch technologys frontiers with innovative functionality, targeted industry expertise, and focused development efforts.
Not surprisingly, the answer is a business case that, by virtue of its detailed objectivity, helps supply chain professionals balance the allure of global integration, the promise of a perfect point solution, and the need to relate features and functions to their own unique cost and performance parameters.
As shown in Figure 2, business case development is a multistage process that often is accomplished in four to six weeks. In the context of this article, operations professionals must give special attention to defining the end state and related benefits (Step 5) and estimating relative costs (Step 7). However, enterprise solutions often provide such compelling cost advantages that the defining concern of ERP versus best-of-breed vendors is often, Can ERP meet my requirements? rather than, Which alternative has better features and functionality?
As the battle between ERP and best-of-breed vendors ensues, companies will have to carefully monitor which vendor is best positioned to help them achieve high performance. Ultimately, the competition will be defined by measurable value best-ofbreed vendors will continue thriving if they can sustain differentiating themselves and providing compelling value-add that can be captured and represented in a business case. ERP vendors, however, are on the march. As long as they continue to release new functions and features that integrate smoothly and quickly into the ever-growing corporate enterprise asset, ERP vendors will continue to test the competitive positions of best-ofbreed vendors.
