Is the Digital Supply Chain an Exit Strategy from ERP?

With the advancement of cloud and digital technologies such as big data, sensors, robotics and artificial intelligence, potential supply chain capabilities seem endless.  In parallel, the large ERP vendors (“big software”) are scrambling to respond. This is good news for all that own and operates an ERP, but sorting out how to make it work can be confusing.

In current state, ERP delivers solid functionality to get the job done, but it’s not always the best solution, nor has it meant to be.  For quite some time some organizations have required capabilities that ERP suites don’t provide.  According to Gartner, there are five stages of maturity as supply chains transition to demand-driven capabilities.  These are as follows: reacting, anticipating, integrating, collaborating and orchestrating.  As supply chains reach the third, fourth and fifth stage of Gartner’s maturity model they quickly recognize the limitations and reality of a single system (ERP).

More healthcare supply chains are now reaching advanced levels of maturity.  Couple this with a younger workforce who grew up as everyday “Digital Consumers”, the pressure to support a “Digital Practice” and the desire for continuous value delivery and you have what many are calling a next-generation supply chain system or the “Digital Supply Chain”.  The purpose of this article is to address how ERP may or may not address this transformation.

Digital Supply Chain

While technology may have enabled “Digital”, it is far more than just that.  Digital has enabled a new business model. The best way to understand this new Digital Business Model is to compare and contrast how a “Pipe (traditional business model)” works versus a “Platform (the digital business model)”.  A traditional business works like a Pipeline. Value is produced upstream and consumed downstream, creating a linear flow of sequential value, much like water flowing through a pipe.  The current Healthcare Supply Chain system is a pipeline that is centered on a highly automated system (ERP).

Platforms, however, work vastly different.  They allow participants to co-create and openly exchange value with each other unbound by a specific sequence (a network). To ensure interactions are optimal, Digital Platforms leverage “Big Data” and “AI” to improve the matching of supply and demand.  This system is specifically designed for real-time transactions as opposed to large batches.

To be honest with you, much of this is not that new or a brilliant idea brought to us exclusively by Millennials.  In an article, Markus, Petrie and Axline suggested an alternative to working differently.  Because of the changeability of the e-marketplace, they said, companies might look to intermediaries to be the “hosters” of ERP functionality.  Only the “hosters” would need an ERP system.  This article was written on January 15th, 2001 (close to 20 years ago).

What the ERP Experts are saying?

In the past, the failure rate of ERP implementations has been anywhere between 50% and 75%.  Failure explains one reason why some are anxious for an exit, however, what many of the more mature organizations have started to question is “Process Control”.  With a traditional ERP, the company must cede significant “Process Control” to the software. ERP modules were originally designed to eliminate process variation and implement “best practice”.  However, one of the side effects was the loss of process flexibility, agility and even efficiency.  While rigidity may have made sense in the past (particularly prior to mature shared services), it likely runs contrary to the goal of true digital transformation.

Will the big software vendors respond?  The experts feel they will. However, first and foremost we have to recognize the vast revenue streams that have been established.  Big software will work hard to maintain and protect these revenue streams for as long as they can.  However, when the timing is right, they will systematically unbundle their offerings to look more and more like their smaller nimble competitors.  Eventually, big standardized software systems will evolve if they expect to survive (much like apps in an app store).

Following are just three of the many opinions that I found in researching the topic (“the future of ERP”).

“The ongoing shift to cloud computing will continue and accelerate.  One of the drivers for adoption is scale: most enterprises are handling greater numbers and variety of goods, services, customer interactions, and marketing activities.”

“New ERP software will be increasingly built on an innovative cloud architecture designed from the ground up to handle the massive computational challenges of processing global enterprise data in real-time.”

“It doesn’t has to be one monolithic environment.  We have an open environment where partners can build on our platform, where solutions can be connected to the network.  We know some specifics cannot and will not be covered (by ERP).”

It is clear that ERP will change.  That said, the obvious question remains, can ERP meet the needs of those that are currently seeking a Digital Supply Chain?

The Foundation

Cracks in “ERP as the Foundation” cannot be just patched over to deliver a truly Digital Supply Chain. In fact, the ERP should not be the Foundation. Modern-day business is centered on speed, agility, innovation and customer engagement.  ERP’s strength has and always will be centered on back-office functions.  It is a “Process Management Platform” and even at that it has lacked outward approaches.  For example, ERP has always been weak in areas such as stakeholder engagement, end to end process management and optimization,  strategic insights and analytics as well as real-time decision support and execution.

Digital companies are centered on “data” as opposed to “processes” and for that reason, it is critical that their foundation reflects this.  As a result, an “Information Management Platform” is needed.  Processes do not go away but instead are brought to “digital life” by this new foundation.  I imagine this is how ERP will be leveraged for those that chose a Digital path for their supply chain (as processes, or apps, that are brought to digital life).

The Digital foundation (or “Information Management Platform”) will have at least four primary features: Data Management, Process Automation, Process Integration and Analytics.  Data Management will allow for cross-platform management of master data and knowledge.  Process automation will remove the man from the machine and enable human resources to focus on higher-value work (such as overseeing the system and teaching it how best to perform).  Process integration will be the way intra and intercompany services are offered.  APIs will be the contract of the future.  But perhaps the most import component is modern-day analytics.  Big data and machine learning will enable end to end interactions that are in context and smart (or artificially intelligent).

Conclusions

Digital maturity combines two separate but related things. One is digital intensity, the level of investment in technology meant to change how the company operates.  The other is transformation intensity, the level of investment in the leadership capabilities needed to create digital transformation.  The question of ERP may be more related to the operator’s desired outcome as it applies to these two dimensions. In other words, the right solution is the one that best fits the organizational strategy.

ERP systems, by themselves, provide incremental improvements to business processes. Digital transformations, on the other hand, materially disrupt current business models.  More specifically, Digital initiatives find ways to leverage innovative technology to provide better products and services to customers.  Whereas ERP implementations are about greater efficiency without changing the business model, Digital transformations are about changing the business model and enabling processes in a different way.

Some that seek transformation will be tempted to bypass the effort required to properly address fundamental issues underlying their existing system.  They will assume that simply replacing poorly functioning areas with new applications will solve the problems.  This may look good for a short while, but will not meet the needs of a truly Digital Supply Chain.  This does not mean an exit from “Process Platforms” such as ERP.  It does, however, require rethinking the ERP as it applies to the foundation (as well as the sole process management solution).