Improving Visibility Into Subsidiary Operations, Part 1

You are responsible for procurement or supply chain operations at the headquarters of a Fortune 1000 technology company. Your team has done an outstanding job selecting preferred suppliers and negotiating prices and volume discounts, as well as setting quality and service targets. You now want to ensure that your hard work is paying off and that the pricing, terms, and service level metrics defined by your team are being followed across the entire company, including smaller subsidiaries, regardless of their location.

In short, you want headquarters to have the visibility and compliance it needs to optimize the overall performance of the business. Similarly, you want subsidiaries to benefit from lower purchasing prices, better payment terms, and higher quality levels that they would not be able to negotiate themselves.

Until now, such a degree of visibility and compliance at the headquarters level has been a challenge. Your subsidiaries are running completely different enterprise systems that are not connected to the headquarter ERP system, and they follow different purchasing processes that do not map to your purchasing process at headquarters. This gap makes it challenging for your subsidiaries to leverage the higher quality suppliers, terms, and conditions of the contracts that you have negotiated.

Furthermore, some of the communication about preferred supplier lists and negotiated contract terms falls through the cracks when spreadsheets and emails are used to coordinate with the subsidiaries. There is now an opportunity to address this issue and fully leverage the headquarters’ supplier arrangements. With legacy systems at some subsidiaries in need of replacement, you can help subsidiaries select a system that best meets their business and budget requirements, yet also addresses headquarters’ need for visibility, compliance, and coordination. But, how do you help them frame the right selection criteria for a new system?

Multiple options are available, each with advantages and disadvantages. In the end, your governance model, together with the business requirements of the subsidiaries, should drive the decision. There are three options that you may consider. Let's start here with the first:

Deploy the same ERP system across the company
Under this option, the corporate ERP system is deployed at every business unit and subsidiary, ensuring that the same processes and metrics are enforced across the entire company. In our procurement example, every stakeholder would use the agreed-upon procurement terms, do business only with approved suppliers, and measure compliance using the same set of rules. Such an approach would give headquarters clear visibility and control over the procurement process.

While some companies have implemented such an approach, especially when their business is homogeneous across the globe, this option of deploying a corporate ERP system in smaller subsidiaries or divisions comes with a set of steep challenges. The process complexity and workflows in a small, autonomous subsidiary are typically very different from those of headquarters or a large division. As a result:

• Smaller subsidiaries are likely to get smothered by process overload
• The cost of implementing the corporate ERP system may significantly exceed the planned budget and skills of the smaller subsidiary
• The corporate ERP system may have to be heavily customized to meet the unique industry, functional, and compliance requirements of the smaller subsidiaries

Hence, in many business environments, such an option may not be viable. Instead, some companies opt for a two-tier ERP approach -- the corporate ERP system is deployed at headquarters and at larger divisions, while a different ERP system that is simpler, easier to use, and better suited to the local financial and regulatory requirements and line of business needs is implemented at the smaller subsidiaries.

In the second and concluding part of this blog, I will discuss two additional options available to companies for resolving issues between diverse operations.