Trade-offs abound in journey to globally integrated enterprise

Evidence suggests a fundamental change is taking place inside companies with global operations. Strategies to outsource, collaborate, and execute seamlessly across the length and breadth of the enterprise are dependent on restructuring business processes and systems for greater transparency and centralized management.

IBM refers to this as the globally integrated enterprise. Framingham, Mass.-based IDC Manufacturing Insights speaks of it as the shift from multinational to transnational corporations. Boston-based AMR Research calls it the performance-driven enterprise.

Whatever the moniker, it's touching a broad spectrum of industries, from consumer packaged goods to steel, electronics, heavy equipment, pharmaceuticals, and high-tech.

In fact, in the automotive industry, Eaton TruckGroup is replacing disparate ERP systems in 26 facilities around the world “one by one with a global instance of Oracle ERP,” says John M. Gercak, director of IT for the Galesburg, Mich.-based, $2.5-billion segment of industrial diversified Eaton Corp. “We're doing this to drive common processes, but also to support growth.”

Balancing technology's promise of seamless integration against shop-floor and supply chain realities, however, raises a host of complex issues:

• Whether it's always best to opt for a single global ERP instance, or whether several regional ERP systems would serve best;
• What processes—including sales & operations planning (S&OP); procurement; and order processing—should be standardized; and
• Whether to keep local such functions as scheduling and inventory management.

In recent years, A.O. Smith, a Milwaukee-based maker of electric motors and water heaters, has made a series of acquisitions in China aimed at gaining cost-performance advantage in electric motor production. Now, to gain increased visibility and centralized production control, A.O. Smith is standardizing on QAD's ERP solution.

Procter & Gamble’s ongoing evolution as a globally integrated enterprise embraces all facets and processes of the business. A focus on core competencies is balanced with extensive partnering and outsourcing of other functions, with production and services provision located around the globe so as to best serve developed and emerging markets.

For one, if the goal is harmonized business processes, getting there can be challenging in emerging markets where basic system concepts such as material requirements planning—long promoted by APICS and other organizations—haven't penetrated deeply.

For reasons that include long distances and language barriers, A.O. Smith elected to implement regional ERP instances. In addition, it had to start with the basics in terms of training local management about system-based production process concepts, as there was little heritage for such.

“It's basic blocking and tackling because they've been doing a lot manually,” Bednar says. “We have to establish the foundation for business processes, and what we want to carry over from practices in the U.S. We have to decide what the workflow is, what the business cycles are, and how to use technology to flow from one functional area to another—which they're not used to at all.”

“A lot of processes were site-driven,” says Bednar, “where business units had the freedom to do their own design and engineering work, including using different part numbers. We found unneeded complexity, and we are normalizing data and processes as we proceed. Looking across plants and sites forces you to address the need to reduce complexity and become more standardized. It makes good economic sense.”

Though the overall technology trend is toward fewer system instances and standardization throughout the technology stack, responding to globalization isn't just about having an efficient technology infrastructure, says IDC's VP of Research, Bob Parker. “It's about designing, producing, and selling anything anywhere,” he says.

Parker cites three examples of the kinds of gains that can follow from a global orientation:

• Based on insight gleaned from its Chinese operations, Proctor & Gamble (P&G) “downsized” product features and packaging to move from Tier 1 markets in large Chinese cities to Tier 2 markets in more remote areas. P&G saw a similar opportunity to do the same within U.S. discount stores drawing immigrant populations.
• Hewlett-Packard applied the lessons of globalization to logistics, shifting from major region-centric distribution centers to a global capability to ship everywhere, from anywhere.
• Mittal Steel is the product of an unprecedented mergers & acquisition spree lasting several years, including major buys in the U.S., Europe, and Asia. It has since leveraged principles of economy-of-scale from its American mills, and quality processes from its European mills to deepen the company's overall core competencies as the world's largest steel producer.

One thing that's sure: The move to a globally integrated enterprise can't be based solely on the lure of cheap labor found in emerging economies.

“Five years ago, manufacturers relocated operations based on potential labor cost savings,” says Sven Denecken, SAP VP of ERP suite solutions. “But as costs in those areas have gone up, some companies are finding that they've suboptimized their processes. It's not just cost, but optimizing your processes for greater efficiency, predictability, and compliance.”

As indicated by Jon Chorley, VP of supply chain product strategy for Oracle Corp., “It's a journey, but many of our customers have embarked on it. With decentralization of manufacturing processes, greater centralization of management is required to coordinate it all.

“Companies begin with the concept of shared, centralized services to achieve overall coordination,” continues Chorley. “Your IT systems must be able to support that. If you're trying to run diverse operations with centralized management, you need robust S&OP. You need to handle different currencies, measurements, and time periods. Robust master data management is a key.”

Eaton's Gercak concurs with Chorley that “[transforming to] a globally organized company has been a journey, but our strategy is to deploy common tools to support common processes throughout our truck division,“ explains Gercak. “We are deploying Oracle to support those processes and drive common metrics used to measure and manage our business.”

To date, 20 Eaton Truck Group facilities have moved to the Oracle ERP system.

“Growth in Asia-Pacific is very strong,” says Gercak, “and we enter those markets with new facilities to support customers there. Oracle ERP scales well globally and lends itself very well to our strategy of moving to common processes. It includes everything from our global supply chain to order management, planning, procurement, manufacturing execution, shipping, and customer information.”

The end state is to plan, execute, and manage common processes at the group level.

“We set up daily schedules and manage the supply of inventory for the plants,” Gercak says. “Oracle gives us the visibility and flexibility to move production around the world to where it's needed most to meet demand and customers' requirements.”

To date, Eaton Truck Group has reduced global on-hand inventory stock by five days, significantly increased on-time performance, and reduced days-outstanding in accounts receivable.

In the end, achieving documented performance gains like this comes down to managing both people and knowledge.

“As you reallocate work around the globe, you still have to knit people together into a common community to tap into the skills and expertise that exist throughout the enterprise,” says Eric Lesser, an IBM Institute for Business Value associate partner.

For example, how do you find the right person to answer a question when you're part of a company like IBM, with 350,000 employees around the world?

“If you have a question, you know the answer exists somewhere within the company,” says Lesser. “Moreover, how do you solve a customer's problem—not just with an answer, but with the best answer?”

Some of the tools IBM uses are part of the emerging social networking tool set, including IBM's own “jam” sessions. These online virtual town-hall meetings typically center on a theme, whereby participants can log on and post threads. Another is the company employee directory, Blue Pages, a searchable interest-and-expertise catalogue and the backbone for social networking.

“Service-oriented architecture has great application here,” says Kal Gyimes, another associate partner in the IBM Institute for Business Value. “It means you're able to do one-off collaboration tools, blending the employee directory and instant messaging, and putting them together in new and interesting ways.”

When the Chinese adage offers, “May you live in interesting times,” the connotation is of tumult and change. These, then, are indeed interesting times, driven by companies seeking to integrate not just systems, but global organizations of people and business processes centered around shared knowledge and practices.

When standardizing globally, “It's important to distinguish what must be kept different from what people want to keep different,” says Oracle's Chorley. “It's critical to establish a long-term vision and road map to identify where you can derive good return. Then drive that process through operations to drive value into the business. Get returns—and gradually, progressively move along the path.”

Manufacturers must see globalization as a growth opportunity, says Boston-based Aberdeen Group. A single global instance of an ERP system has benefits, but must be able to deal with currency exchange, inventory transfers, consolidation, and translation.