September 3, 2002

Points of the Triangle

ERP II is a major advance in strategic business software technology. But don't expect to get there without big changes in how you do business

by Mirghani Mohamed

Gartner Group invented the term ERP in the 1990s. Recently, in 2001, it also came up with a new term for next-generation ERP systems focusing on integration, transformation, and collaboration in the business value chain: ERP II.

The ERP II architecture has many technical and functional strata, but one of its more important features is that it provides a conduit for knowledge sharing. Interestingly, the evolution of ERP itself is a result of adding layers of knowledge-based functionality to a Materials Requirement Planning (MRP) nucleus, which itself was a metamorphosis of a simple inventory control system. MRP originated in the '70s when the economy was based considerably on tangible assets. Over time, as the economy's emphasis gradually shifted toward intangible or knowledge-based assets, MRP II systems emerged, eventually evolving in the '90s into ERP systems with more complex and integrated business modules for the entire organization, not just the manufacturing function. (See Figure 1.)

Conventional ERP systems are characterized by their focus on increasing intraenterprise business process flexibility, transparency, effectiveness, and efficiency. Although these systems have improved order fulfillment tremendously, they fall short of addressing interenterprise business process complexities associated with supply chain collaboration. This goal requires a collaboration-based "ecosystem" that compels valued customers and shareholders to share pertinent business knowledge. Such a system is prescribed by Gartner as ERP II, which it defines as "a business strategy and a set of industry-domain-specific applications that build customer and shareholder value by enabling and optimizing enterprise and interenterprise collaborative operational and financial processes" (Research Note SPA-12-0420).

This definition transforms the traditional back-office ERP system from internal transactional system into a complete value network system that incorporates front-office functionalities for various customer communities. Integrating the front and back office enables an "information visibility" strategy that pushes the right information to the right people at the right time through the right communications channels. For instance, using Vendor Inventory Management (VIM) techniques, a supplier can connect to factory ERP modules of another company to determine how many parts are still in the stock. Furthermore, a retailer that wants to know order status can log into the company's ERP through a secure, Web-friendly system and verify the processing stage, specifications, invoices, agreements and any related information that may help in future ordering. In other words, ERP II is a competitive strategy that integrates a centralized, core ERP system with highly specialized solutions such as supply chain management (SCM), CRM and knowledge management (KM). (See Figure 2.) SCM and CRM subdomains that were previously standalone applications restricted to in-house transaction management, such as advanced planning and scheduling (APS) and partner relationship management (PRM), are also components of ERP II architecture.

The quantum leap here is in managing information value chains to establish an array of internal and external long-term relationships. This collaborative integration of the entire value network increases information transparency, speeds the decision-making process, and decreases response time. It promotes knowledge accessibility for cooperative dialog that may result in innovative ideas and optimal solutions for complex problems.

In essence, with an ERP II implementation, the company is morphed into a social community that coalesces, synthesizes, and diffuses domestic and exotic knowledge. Domestic knowledge exists within the organization and circulates among its employees, while exotic knowledge is external to the organization, and is mainly contributed by customers during the specification of their requirements. In ERP II, the company's supply chain process is integrated with the supplier's supply chain system, and hence it isn't limited to planning, materials, manufacturing, and product distribution but extends to retailer shelves and direct customer feedback.

Leveraging customer knowledge about a company's products is a competitive advantage for two major reasons. First, it promotes customer loyalty by ensuring that the customer is fully informed about the company's domain of products and core competency. Second, sharing knowledge has never obeyed the law of diminishing returns; in fact, sharing of knowledge exactly contradicts that law: The more knowledge shared, the more turnover achieved, which may result in a potentially rewarding "double-loop learning" atmosphere. (Double-loop is a learning process where the current organizational norms and assumptions are questioned to establish a new set of norms.) Consequently, every dialog with the business partner is a bidirectional learning experience that results in a mutual benefit. For example, in Cisco Systems Inc.'s case, the company and its suppliers gain knowledge about what customers need, while customers are able to communicate their requirements, specifications, and preferences directly to the manufacturer and its suppliers.

But for any organization, because of the complexity of putting a multifaceted coordination mechanism implied by ERP II into practice, a revolutionary change must take place at three different levels: technology, business process, and people. (See Figure 3.)

Technology

For companies to maintain agility, growth, and competitiveness, technology goals must be aligned not only with internal business processes, but also with those of diverse partners, customers, suppliers, and distributors. Hence, a main theme of ERP II technology is the componentization and integration of many pieces that facilitate cooperative work between the company and different market channels.

This goal requires a high level of interfacing, interoperability, and compatibility among different components in the market. However, there is no clear-cut choice on which technology option to select because your choice will depend on interreliant factors with outcomes determined by business process, budget, technical expertise, and cultural acceptance.

Available CRM technologies exist either as standalone, best-of-breed applications from companies such as Siebel Systems Inc., i2 Technologies Inc., E.piphany, PeopleSoft Inc., and Kana Inc.; as modules in ERP suites such as mySAP.com and Oracle E-Business Suite 11i; or as crossbred systems such as J.D. Edwards-Siebel. In all cases, both the back-office ERP and the front-office CRM-SCM frameworks are built on complex technological foundations. Originally, ERP systems were monolithic systems designed to perform domestic business processes and not suitable for use in solutions such as e-commerce (B2C) or collaborative commerce (B2B). For this reason, with ERP systems, supplier and customer channels need to be integrated via proprietary gateways or out-of-the-box enterprise application integration middleware. To solve this problem, ERP II architecture is built on open architecture and module componentization. These new features add a seamless integration backbone for third-party software such as CRM and SCM tools.

There are other add-on technologies for ERP II that play a major role in "opening" ERP systems, such as interactive voice response scripting, portals, "push" technologies, and intelligent agents. For example, mySAP.com implements many of these technologies to support telemarketing, telesales, and customer services centers. It also provides access to viable data through a subscription mechanism, push technology, and customer self-service.

Business Process

Changes in people and technology affect how you do business, but changing the business process influences what you do. Hence, no ERP II implementation can be successful without a change in business processes.

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