Real-Time Enterprises Need ERP II and Other Applications

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1 Strategic Planning, B. Zrimsek, L. Geishecker, Y. Genovese Research Note 26 November 2002 Real-Time Enterprises Need ERP II and Other Applications Real-time enterprises require expanded business application functionality, supported by changes in manual process activities and metrics. Enterprise resource planning II is a necessary, but not the only, element in this initiative. Core Topic ERP II, Supply Chain & Manufacturing: ERP II Strategies, Applications and Technologies Key Issue How will ERP II support current and emerging business models and key enterprise business initiatives? Strategic Planning Assumption By 2007, the need for real-time business processes and measurement will drive Global 1000 enterprises to deploy ERP II as an enabler for business process cycle time reduction (0.7 probability). "Citius, Altius, Fortius" (Faster, Higher, Braver) Enterprises are following the motto used by ancient Olympians: Faster, as more and more enterprises strive for real-time capabilities that remove latency from processes in support of more-connected business models, which demand accurate and timely information. Higher return on investment and earnings per share via costcutting, modified business models and a renewed focus on core competencies. Bravery in the form of collaboration, customer and supplier portals, marketplaces and fundamentally more-open business models and application architectures. The Internet has created a world of chaotic competition in which customers have more choices and suppliers have more opportunities. This is driving the most fundamental change in enterprise applications that will occur through 2007 a move toward the agile and highly focused enterprise that executes in or near real time. Real-time enterprises (RTEs) are harder to identify than the enterprises of the industrial era of business. These agile and flexible enterprises are more "virtual" and can quickly align business partners and assets, deliver products or services through internal, direct or outsourced models, and exploit competitive advantage when new opportunities emerge. The flexible and fluid RTE business structure avoids restrictive, tightly coupled, static business relationships. Instead, it uses a moredynamic, loosely coupled, opportunistic approach that focuses on synchronization that is, bringing the right knowledge, competency and information together in real time from within or Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 outside of the enterprise to most effectively and efficiently execute end-to-end business processes. Serving virtual, RTEdriven enterprises will mean substantial changes to business application vendors and products, especially enterprise resource planning (ERP). The ERP II evolution has begun (see "ERP Is Dead Long Live ERP II"). It is part of a broader application evolution that enables enterprise-centric financial and operational processes. ERP II will be a critical component of any RTE strategy. However, ERP II alone will not suffice. Similar to its predecessors material requirements planning (MRP), manufacturing resource planning II (MRP II) and ERP ERP II enables enterprises to optimize business processes by shortening process cycle times and enables quick, efficient analysis and decision making. Because ERP II is enterprise-centric, however, when interactions between enterprises need to happen in real time, ERP II will need help from other business applications, such as from customer relationship (CRM), product life cycle (PLM) and supply chain (SCM). Prediction: Through 2007, enterprises that seek real-time business process capabilities will have to deploy ERP II as the core of their business application portfolios. By 2007, the need for real-time business processes and measurement will drive Global 1000 enterprises to deploy ERP II as an enabler for business process cycle time reduction (0.7 probability). The operational and financial processes enabled by ERP II directly support and enable the lower six "cyclones" of the RTE model across the "operate" and "manage" layers (see Figure 1). 26 November

3 Figure 1 The RTE Cyclones ERP II Enabled Source: Gartner Research These cyclones are the focal points of activity where enterprises may gain significant advantages by reducing end-to-end cycle times. The manage and operate cyclones, or process areas, are within the realm of ERP II, placing it at the center of an RTE strategy. Note 1 Examples of Process Improvements MRP, an earlier version of ERP II, was developed and deployed to handle the overwhelming task of managing the exploding of multilevel bill-of-material structures that are used to deal with aggregate manufacturing and purchasing needs. When first deployed, MRP made planning functions more efficient. It has since been enhanced by the inclusion of capacity- and distribution-planning capabilities. Similar examples include inventory (using ERP, rather than handwritten inventory cards) and accounting (replacing manual ledgers with automated, integrated financial systems). Traditional ERP functions provide baseline capabilities in the cyclones. From their inception, these capabilities have provided significant processing efficiencies (see Note 1). However, they are no longer sufficient. New applications have been developed and deployed to extend traditional ERP processes and automate processes (or process components) that ERP did not address. ERP II is at the center of the RTE, but it is not the whole business application suite that enables the RTE cyclones (see the example in Figure 2). 26 November

4 Figure 2 Enabling the RTE Cyclones Order to Cash Procure to Pay Concept to Concrete Requirement to Resource Objective to Organization Result to Report CPM EAM ERM SRM ERP II + CRM + SCM ERP II + SRM + SCM ERP II + PLM + SCM ERP II + SCM + EAM ERP II + ERM ERP II + CPM Corporate performance Enterprise asset Employee relationship Supplier relationship Source: Gartner Research From MRP II to ERP to ERP II, enterprises have been working at improving established and re-engineered business processes. Applications such as MRP II and ERP have enabled enterprises to increase process cycle times, reduce errors and move from offline to online processing and decision support. ERP II continues this improvement by enabling enterprises to extend their processes beyond the traditional four walls of the business. Impact on 2003: Suite and Component Readiness In 2003, vendors and enterprises will prepare for this new age of RTE. Vendors have taken the first steps by making their applications more open. ERP II vendors such as SAP, Oracle and PeopleSoft have delivered the first wave of architecture changes in the past several years. However, this is not enough. As users demand deeper integration, vendors will refocus their efforts on combining technology delivered with application functionality. For example, PeopleSoft and SAP entered the procure-to-pay business market by combining their ERP II products with integrated supplier relationship (SRM). Both vendors' products were not delivered for their solutions alone, but include embedded technology that allows integration into competing ERP II products. We expect that this trend will continue in 2003 and beyond, with new components delivered in the same manner. For enterprises, this type of component integration will be important in the RTE, giving enterprises flexibility to integrate with members of their supply chain at the component level. In addition, it will allow vendors to deliver products faster because they will be focusing on building the smaller components, rather than delivering a large, self-contained solution. Thus, enterprises 26 November

5 benefit by being able to choose implementation of components, rather than implementation of a suite. In the future, although enterprises may choose a vendor as their major suite supplier, integration at the component level will be increasingly important. Reacting in 2003: Deployment Issues Enterprises need to start ERP II deployments to achieve the RTE. Deploying ERP II continues the evolution from MRP and brings increased functionality that is enabled by faster and moreresponsive architectures. Despite these improvements, the ability of many enterprises to achieve the RTE with ERP II can be limited by the decisions made during deployment and complicated by limited flexibility in application reconfiguration after the "go-live" date. Business policy, process or partners that do not operate in real time will restrict enterprises' real-time operations capability, bringing it to the level of slowest input. Real-time constraints that can cause problems include: Manual Process Latency: Each application-enabled business process is at the mercy of its inputs. For example, material planning in an RTE requires real-time data from many sources. The main inputs into traditional material planning engines are inventory, capacity, supply (including open and planned orders) and demand (including open orders, forecasts and contracts). ERP II systems will maintain inventory, supply and demand information as close to real time as the data is entered by users. If an enterprise chooses, by practice or policy, to record material receipts only at the end of a shift, the system-recognized inventory and the subsequent planning run will drift from real time to a latency of up to eight hours. For some enterprises, an average latency of four hours may be "good enough." For others, real time will be preferred. Action Item for 2003: Ensure that processes are supported by "right-time" inputs. Where real-time processing is required, ensure that real-time inputs are used. This may require the use of data collection devices, such as radio frequency identification and bar codes, as well as policy and process changes. Legacy System Latency: ERP II deployments often include integration with legacy applications. If these systems can't react to inputs in real time, enterprises won't operate in real time. Action Item for 2003: Identify the legacy systems needed to support real-time activities and develop plans to update them organically or by migrating to a real-timecapable solution. Business Partner Data Latency: When working in connected supply chains or other collaborative environments, an enterprise is one link in a larger, real-time, 26 November

6 value network. It must provide data to, and receive data from, key business partners in real time. Without real-time links between trading partners, an enterprise's ability to perform in real time likely will be hampered. Action Item for 2003: Lower your expectations for real-time business-partner relationships. Enterprises must become real-time-capable internally before providing real-time connectivity. Through 2003 and until all parties are real-time-capable, focus on the deployment of a reliable infrastructure to support connectivity and communications. Where necessary, help key partners in their efforts to achieve real-time capability by sharing best practices and lessons learned. Business Reaction Latency: Enterprises that deploy realtime processes without real-time metrics, decision support and decision-making processes will be challenged to react properly to changes in the business environment. Action Item for 2003: Develop and deploy metrics that are relevant to real-time operations, and implement decision-making strategies that can react and respond in real time to changing business conditions. Acronym Key CPM CRM EAM ERM ERP MRP MRP II PLM RTE SCM SRM Corporate performance Customer relationship Enterprise asset Employee relationship Enterprise resource planning Material requirements planning Manufacturing resource planning II Product life cycle Real-time enterprise Supply chain Supplier relationship Data accuracy is another critical issue. The computing maxim, "garbage in, garbage out," applies. Without accurate and audited data, enterprises risk being real time, but wrong. The alternative is to choose to be right, and to only be as fast as required to be effective. Bottom Line: In 2003, the need for enterprises to operate at or near real time will grow. ERP II will become an increasingly critical enabler of business processes (cyclones). However, enterprises should not expect ERP II to be the sole answer to an RTE's needs. Instead, they should deploy ERP II as part of a larger application portfolio. Like ancient Olympians, enterprises must carefully prepare as they strive for improvements. To achieve RTE, enterprises should work to reduce latency in processes, systems and partners. 26 November