Should you source your next Direct Store
Delivery system from your ERP Vendor?
Executive White Paper
March 2006
Numeric Computer Systems
Executive Summary
• Do your existing
ERP modules limit
your ability to
execute your optimal
sales and distribution
strategy?
Modern ERP systems are almost ubiquitous amongst large and medium sized Food
and Beverage firms around the world. Despite the seductive lure offered by ERP
vendors of snapping in a single application to address all the business needs, many
firms have found that a single-vendor suite of software does not contain the depth of
features to yield the organisational efficiency, flexibility and business strategy
• Does your sales and
distribution system
accommodate
emerging trends like
EDI and Vendor
Managed Inventory?
alignment sought.
For Fast Moving Consumer Goods (FMCG) companies engaged in Direct Store
Delivery (DSD) distribution, as is common around the world, the inability of software
to match the business needs is critical; as frequently a majority of sales revenue is
• Does your generic
sales and distribution
system cost you
revenue
opportunities?
generated via this complex sales and distribution model.
The emergence of flexible middleware, standardised integration models and the
Internet has allowed progressive firms to adopt a best-of-breed DSD system at no
• Are your processes
so different from
similar businesses
around the world that
there are none that
can be leveraged?
additional total cost, while also preserving one of the significant benefits gained from
ERP system implementations, the common data model.
Best-of-breed systems
encapsulate the know-how and specific industry experience of niche software
vendors to better align IT with business needs, resulting in increased flexibility and
improved business performance.
In Praise of ERP Systems
Since modern packaged software first emerged at an enterprise level in the 1980’s
with Oracle Financials, and in 1991 with SAP R/3 the adoption of these ERP
packages, as they came to be known, has been the singular most dominant IT
project.
The thrust of the marketing argument used by package ERP software
vendors was that by supporting data and business process integration under a single
application umbrella users could better integrate their business functions and better
manage and scale their business processes1.
Whether the need was driven by Year 2000 compliance requirements, a desire to
integrate departments, a fear of not keeping up with technology, or globalisation /
standardisation needs, companies have lined up to spend enormous amounts of
money and resources to implement ERP systems2.
Various surveys have suggested that historically the opportunity to replace a tangle of
complex, disparate and obsolete applications with a single system from a reputable
1. Various SAP marketing literature produced between 1999 and 2004
2. O’Leary, D., “Enterprise Resource Planning Systems: Systems, Life Cycle, Electronic Commerce, and Risk”, Cambridge
University Press, 2000
and stable vendor was a very attractive proposition3. In the future it appears likely
that the already installed ERP systems will form the infrastructure for the next
generation of systems, while specialised line-of-business systems will be added to
address specific business processes and thereby better align the IT infrastructure
with the business needs4 and allow the business to climb the staircase of IT value
(figure 1).
Competitive
Advantage
Process
effectiveness
Process
efficiencies
Build on ERP
infrastructure and
extend capabilities
through use of new
technologies
IT cost
savings
Improve business
processes and
capture savings
through incremental
initiatives
Source: Adapted from “A second wind for ERP”, McKinsey & Company, 2000, Number 2
Figure 1 - The Staircase of IT Value
What unique functions are needed by a DSD FMCG business?
Despite many FMCG firms implementing modern ERP systems, the uniqueness of
the DSD sales and distribution model demands specific features seldom found in
generic ERP systems (figure 2). That many large FMCG firms continue to use legacy
systems for their DSD requirements5 despite extensive ERP projects demonstrates
that critical gaps exist in an ERP suite within a FMCG firm.
Unique FMCG Customer Need
DSD System Feature Needed
Allow consolidation of transactions into logical groups
A FMCG firm is typified by a large number of low-value
before posting to the ERP system reducing the numtransactions.
ber of ERP transactions significantly.
The short time between manufacturing, order, distribuRemoval of all un-necessary process steps, screens
tion and consumption means that the transactions
and fields to enable high speed throughput.
need to be processed at light speed
Use pre-configured routes, delivery schedules,
Cost of transaction must be low as the FMCG typically
historical activity, reporting by exception and other
has low profit margin per transaction.
features to process transactions cost effectively.
In the FMCG environment there is a need for Standard Hand helds, vendor managed inventory and other
Orders, Stock to Orders, Peddle Orders, Tele-sales
industry specific requirements are at the core of
orders and hand held computers
specialised DSD systems.
The ability to handle COD type deliveries and track
containers delivered and returned
Handling various distribution and payment models is
inherent. Reporting by reason code and exception ensures cost effective transaction processing.
The movement of Inventory is unique in the FMCG Industry. The need to “balance” the inventory through
Route Settlement is essential to FMCGs.
Route Settlement is a core function. Systems keep
track of inventory from platform to customer and back,
charging the Driver for any discrepancies.
Figure 2 – The Unique Needs of FMCG DSD firms
3. James, D. & Wolf, M., “A second wind for ERP”, McKinsey Quarterly Review, 2000, Number 2
4. Greenburn, J., “Build vs Buy in the 21st Century”, Intelligent Enterprise, 22 April 2003
5. For example “Sizing up Sales Solutions”, Beverage World, October 2005
Don’t ERP systems provide all the functions my business needs?
The vision of snapping a single application into a complex sales and distribution
business is seductive, but the reality is complex. Despite the efforts of ERP vendors
a single vendor ERP suite providing all the business functions is less prevalent than
their marketing messages would imply6.
For FMCG companies the unique
complexity of the DSD sales and distribution model makes the ‘shoe-horning’ of a
single vendor solution into a complex business almost impossible.
Further evidence of the need for ERP system extensions to better align IT with
business needs is provided in a recent survey of CIO’s wherein industry-specific ERP
system extensions was the second largest budget item for leading CIO’s7.
The inability of installed ERP systems to produce tight alignment with business
strategy for FMCG systems was also highlighted in the 2004 Grocery Manufacturers
Association Technology Investment and Effectiveness Study (excerpt in figure 3). In
this study Optimising Business Processes and Aligning Business and IT Strategies,
both symptoms of the ERP system failing to address the functions needed for the
business, were identified by business executives as being the two most significant
drivers of IT spending.
High
Medium
Low
Optimise Business Processes
Reduce IT Budgets
Reduce ROI of IT Capital
Aligning Business and IT Strategy
Business Agility
Improve Trade Customer Service
Support Cost-Reducing Projects
IT Organisation Governance
Disaster Recovery /Bus contingency
Global data Synchronisation
Financial Reporting
Security
Satisfying Customer Imperatives
Improve Service to Bus Users
Retain skilled IT staff
RFID/EPC
Regulatory Compliance
Maintain Pace with Technology
Support Growth Initiatives
Customer Collaboration
E-business
Supplier Collaboration
Source: 2004 GMA Technology Investment and Effectiveness Study
Figure 3 – Business Executive drivers of IT Spending in FMCG Firms
Clearly vanilla ERP system implementations are not able to address the needs of all
customers, including FMCG firms. Despite ERP vendors attempting to close this
functionality gap by developing new modules and systems, often in partnership with
their FMCG clients8, the ability for ERP vendors to effectively close the gaps remains
very unclear9. Moreover, when, and if, such gaps are addressed by the ERP vendors
will their new and unproven systems offer more value to customers than the existing
and proven best-of-breed DSD systems offered by experienced niche software vendors?
6. “The End of the ERP Suite?“, Peerstone Research, 2004
7. Kanakamedala, K., Krishnakanthan, V. & Mark, D., “CIO Spending in 2006”, McKinsey on IT, Spring 2006
8. For example, “Coca-Cola Enterprises Joins SAP in Direct Store Delivery Initiative to Enhance Sales, Logistics, Service
and Mobile Applications”, SAP Press Release, 12 February 2004
9. For example “Falling Flat?”, Ziff Davis media Inc, 14 January 2005
Evaluating Single-Vendor Suite and Best-of-Breed
The most common argument in favour of the single-vendor suite approach is that
best-of-breed solutions are more difficult and more expensive to integrate into the
ERP infra-structure. All else being equal, this is a sensible view. Unfortunately, all
else is usually not equal. The integration advantage of the single vendor suites has,
in most cases, proven too small to outweigh the benefits of the tighter business fit
with specific business processes promised by best-of-breed systems10.
Although application pricing is generally shrouded in non-dislcosure agreements, and
therefore a little opaque, software license fees for best-of-breed applications do not
appear to be higher than for equivalent suite modules. This is hardly surprising as
suite vendors do not enjoy any special cost advantage in developing software
compared to best-of-breed vendors and economies of scale are weak in software
development. Indeed, it might be argued that best-of-breed vendors possess unique
know-how and experience to allow them to develop niche solutions more cost
effectively than single suite ERP vendors. Moreover, applications built by best-ofbreed vendors must be successful as such vendors have few alternative revenue
streams to cross subsidise unsuccessful applications. This inevitably encourages
cost effective development and a close fit with market needs within best-of-breed
vendors.
It will certainly cost less to integrate a single-vendor suite DSD function than to
integrate a best-of-breed application. However, the integration benefit needs to be
balanced against the frequent need to either customise the single-vendor application
or accept a significant compromise in functionality.
The previously referenced
surveys and studies suggest that business executives are no longer prepared to
accept this compromise as it impacts on the execution of their business strategy. All
cost components considered, the integration benefit offers little or no net reduction in
the final costs for professional services6.
Modern middleware applications are eliminating the requirement that all ERP
modules share the same database. Middleware allows application components to
communicate through standardised messages and thereby share data. As a result,
the integration of disparate best-of-breed applications has become increasingly
flexible and manageable (figure 4).
ERP vendors have recognised this trend and have been shifting their product
development efforts to focus on emerging open suite architectures using Web
Services and XML standards11.
Importantly, this architectural transition further
diminishes the integration value associated with single-vendor suite applications.
10. “ERP Benefits Realisation: What it takes to see results”, AMR Research, 2004
11. Various SAP marketing literature, 2005
Single-vendor ERP
Open-component architecture
Internal user
Proprietary
user interface
External user
Web browser
Web browser
Internet
Financial-software
component from
Vendor A
Finance
Human
resources
Internal user
Inventory
management
Single
database
Production
planning
Sales and
distribution
Message
hub
Order-entry
software
component
from Vendor A
Human-resources
Supply-planning
software component software component
from Vendor C
from Vendor B
Source: “A second wind for ERP”, McKinsey Quarterly Review, 2002 Number 2
Figure 4 - New Technologies create new choices for ERP Systems
While the large ERP vendors marketing continues to trumpet the benefit of a singlevendor suite they are aggressively moving to make it easier to integrate best-of-breed
applications. FMCG firms, even those with the greatest implementation budget and
resources, continue to rely upon best-of-breed applications for critical business
functions5.
What does the future hold?
As evidenced by surveys, the truth is that companies have never stopped wanting
applications that best fit their business need and allow them to climb the staircase of
IT value. They accepted compromises in functionality when the costs of integration
outweighed the costs of the lost functionality. As the cost of integration reduces
through the use of standardised interface protocols the pendulum will naturally swing
back towards best-of-breed applications.
In any FMCG firm some ERP modules will likely be considered best-of-breed, but
specialised niche software vendors will supplement the ERP modules to provide a
rich ecosystem of functionality.
The integration of niche best-of-breed vendors,
encapsulating specialised know-how and experience that is difficult for generalised
ERP vendors to replicate, will result in a better alignment of IT with business needs.
Taking the analogy of ecology to its logical conclusion, it is not hard to predict that
some of the ERP vendors currently most feared best-of-breed competitors will morph
into symbiotic partners who contribute to the overall health of the system, even as
they pick off the mother brand’s weaker modules. This competitive ecosystem model
is the model that must be adopted by the successful ERP vendors as it is the only
model that scales efficiently.
Conclusion
The unique DSD sales and distribution model employed by FMCG firms has proven
difficult for generic ERP vendors to incorporate into their application. The unique
know-how and experience provided by niche software vendors has meant that bestof-breed applications have produced more value to organisations than the equivalent
functions offered by single-vendor ERP suites.
The evidence is unclear whether modules provided by ERP vendors central to a
FMCG firm, like a DSD module, are weak or simply non-existent. In any event, the
largest FMCG firms with the largest ERP implementation projects have retained their
best-of-breed DSD applications as the cost of poor business alignment was too great
to outweigh the benefit of integration.
It is likely that the use of best-of-breed applications will continue, and indeed grow,
despite the attempts of ERP vendors to address the functionality gaps. Through the
use of standardised interface protocols integration is becoming easier, cheaper and
faster, eliminating the integration benefit single-suite ERP vendors tout. Indeed, the
unique know-how and experiences inherent in best-of-breed applications is almost
impossible for single-suite ERP vendors to replicate.
Andrew Dove (andrew.dove@ncssuite.com) has 18 years IT experience in the
FMCG environment and manages our Asia Pacific business from Sydney, Australia