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.

— Sheila Zelinger is vice president of portfolio marketing at SAP, which includes SAP Business Suite as a corporate ERP system, as well as multiple solutions including SAP Business All-in-One, SAP Business ByDesign, and SAP Business One for midsized organizations, including subsidiaries.

5 comments on “Improving Visibility Into Subsidiary Operations, Part 2

  1. DataCrunch
    March 6, 2011

    Sheila, thanks for your insight.  I agree that an integrated solution is the best means to provide the necessary visibility.  However, I would argue that in many cases a best of breed approach can offer a lot more benefits and functionality than the single ERP approach.  There are many factors to analyze in making a determination on which approach is best, but I would add best of breed to your options versus only single or 2-tier ERP options.        

  2. Sheila Zelinger
    March 6, 2011

    Dave,there is definitely a role for best of breed applications to extend the functionality of ERP.  The ideal solution, which is one that SAP offers, integrates not only the ERP systems of subsidiaries and headquarters, but provides a technology platform that enables integration of other applications, irrespective of vendor.  Thus, true business network integration.

  3. prabhakar_deosthali
    March 7, 2011

    While it is welcome to have an integrated approach for the ERP systems of the head quarters and the subsidiary companies for the financial data consolidation and easier reporting for the top management, we also need to preserve the autonomy of the subsidiary in decision making especially for the activities like purchase. Since the managemnt of the individual sunsidiaries is responsible for day to day running of the business, any imposing of say a paryicular vendor or a particular rate for an item purchase will hamper the the strategic decision making powers of the individual subsidiaries. So let them run their own business and make it profitable by using their own strategies for purchase and sale. They should not have a feeling of the big brother watching.

  4. Sheila Zelinger
    March 8, 2011

    Enabling the autonomy and the flexibility of the subsidiary so that it can best meet the needs of its customers is the essence of a 2-tier ERP architecture.  The choice of solution at the subsidiary and the extent of integration is a matter of governance. What's important is that the subsidiary have a choice of solutions so that it can select the one that best-fits its needs (e.g., functionality, budget, timeline); and that the points of integration are driven by business needs, carefully balancing between the need for subsidiary independence and the headquarter's desire for network-wide visibility.  

  5. stochastic excursion
    March 8, 2011

    Good coverage of excellence in software development: the focus is on the right tools for the right job.  A system that can integrate multiple organizations, to the degree that the headquarters adds value to the business processes of the subsidiary, has the qualities of an industry standard.

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