Improving Visibility Into Subsidiary Operations, Part 2

In Improving Visibility Into Subsidiary Operations, Part 1, I discussed the strategies a company can deploy to ensure it has adequate visibility into subsidiary operations. The first option involves introducing a common ERP (enterprise resource planning) system across the company. This ensures that the same processes and metrics are enforced throughout the business.

There are two additional options available to the enterprise:

Deploy a two-tier ERP approach with simple data integration between headquarters and subsidiaries
In this option, the company implements a corporate ERP system at headquarters and larger divisions, a different ERP system at smaller subsidiaries, and a layer of simple transactional data integration (or rollup) between the two ERP systems.

The most popular scenario under this option is rollup of financial data from the subsidiary system to the corporate ERP system to enable financial consolidation for fiduciary and management reporting at headquarters. This technique is often seen in an environment where the subsidiary runs its operations at arm's length from headquarters or when headquarters is a holding company with several independent and autonomous entities, each with its own business model.

In such scenarios, the role of the integration between the two ERP systems is to enable financial consolidation of the information from the subsidiary to headquarters. Any subsidiary ERP system that supports rollup-level data integration with the corporate ERP system will meet headquarters requirements. However, this approach is not sufficient if headquarters and the subsidiary need to collaborate or coordinate their activities more closely.

Deploy a two-tier ERP approach with process integration between headquarters and subsidiaries
With this option, the company implements a two-tier ERP model, but the integration between the two ERP tiers goes beyond the simple data consolidation discussed above. It integrates business processes, such as procurement, across the two systems. This approach is ideal for scenarios where headquarters and subsidiaries need to coordinate activities or collaborate with each other.

For example, in a scenario defined in Part 1, where headquarters and subsidiaries want to coordinate purchasing activities, corporate purchasing negotiates a contract with a global supplier and defines the contract terms in the corporate ERP system. By integrating the two systems, the vendor terms negotiated by headquarters are available to the subsidiary. In this situation, the subsidiary has the autonomy to create a purchase order in its own system and use its own processes for approving requisitions and receiving goods, but it is also able to leverage the contractual terms negotiated by headquarters.

As a result, the subsidiary typically benefits from lower prices and more timely delivery. Additionally, when the purchasing transaction is completed in the subsidiary ERP system, the procurement information is automatically updated in the ERP system at headquarters, giving corporate purchasing visibility into how well a negotiated contract is performing and whether the contract needs to be renegotiated to support higher than planned volume or different service levels. Furthermore, if corporate purchasing renegotiates the contract at any time, the new terms are automatically visible to the subsidiary as a result of the integration between the two ERP systems.

In corporate governance models where headquarters and subsidiaries collaborate around activities such as budget planning or supply/demand forecasting, have common functions, such as shared finance or HR services, or have common processes that require coordination, such as in the procurement example just discussed, this process integration between headquarters and subsidiaries is the best way to implement a two-tier ERP model.

As we have seen, there are several approaches for providing the visibility headquarters needs to coordinate and collaborate with subsidiaries. A single ERP system may not always be the best approach, especially if subsidiaries have very different business models, economics, or other business requirements. A two-tier ERP model is the right option for such scenarios.

The first option above supports light data integration between the two ERP systems, enabling you to effectively implement a two-tier ERP model for subsidiaries that operate very independently or only need to provide financial data for consolidation to headquarters. However, if some level of cooperation between headquarters and subsidiaries is needed in their supply chain operations, shared services, or collaborative planning activities, then the second option, two-tier ERP with process level integration, is the best approach.

This option gives the company the best of all worlds: Subsidiaries get a system that meets their business and budget requirements and provides them the flexibility to innovate and compete effectively in their local markets, while meeting the compliance and coordination requirements of headquarters.