Commentary | IT Matters

Improving Logistics and Distribution Processes at International Subsidiaries

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Mike Morel, Senior Director of Marketing, SAP, 650-461-1877

Large enterprises continue to set up international subsidiary operations to find opportunities for growth. These subsidiary operations include sales and distribution offices, small operating divisions, customer service units, and joint ventures. They often need to develop their own logistics and distribution mechanisms to receive inbound shipments, store inventory and deliver orders to their customers.

Unlike larger operations, a vast majority of these subsidiaries still use manual methods such as spreadsheets and emails to manage their inbound logistics, warehousing, and distribution processes, which can be inefficient and lead to higher warehouse management and transport costs. Using manual methods also prevents these processes from being integrated with the organizations' order management and customer service processes, leading to potentially higher expediting and inventory carrying costs, and less effective shipment management, which affects customer delivery metrics.

Internal benchmarks show a large gap between the performance of logistics and distribution processes at best-in-class vs. average organizations:

  • Warehouse management costs at top 25-percent performing organizations is 0.3 percent of revenue vs. 1.2 percent at average-performing organizations
  • Outbound transport spend at top 25-percent performing organizations is 0.8 percent of revenue vs. 2.1 percent at average-performing organizations
  • Expedited transportation cost at top 25-percent performing organizations is .024 percent of revenue vs. .136 percent at average-performing organizations
  • Inventory carrying cost at top 25-percent performing organizations is 0.8 percent of revenue vs. 1.7 percent at average-performing organizations

The operational complexity at most of the subsidiaries is less than that of the corporate or large divisions. In addition, their IT budgets are limited, and they have access to fewer IT resources. Finally, most of these subsidiaries operate as a cohesive entity, so their distribution and logistics processes should be tightly integrated with the procurement and order management processes. As a result, rather than investing in a best-of-breed distribution and logistics system, it makes more sense for them to automate their logistics and distribution pr cesses using the subsidiary's business system.

Steps in the Right Direction

It may not be feasible to replace every subsidiary's business system so that its distribution and logistics processes can be automated. The first step should be identifying subsidiaries where the intensity of distribution and logistics processes is high, but their operations metrics for those processes are significantly below best-in-class. These subsidiaries are the initial candidates for automating distribution and logistics processes. If the business system at a shortlisted subsidiary has been recently implemented or meets the needs of the subsidiary very well, the best option is to deploy the distribution and logistics capabilities of the new system.

If the recently deployed system doesn't have such capabilities, however, an alternative option is deploying a standalone distribution and logistics system and tightly integrating with the existing business system.

In many situations, the existing business system at these shortlisted subsidiaries also needs to be changed because:

  • The subsidiary may be working around current system's limitations by using manual methods for managing various processes, information rollups, operational reporting and compliance.
  • The business system at the subsidiary may not have the capability to meet corporate's requirements for
  • tighter integration between the subsidiary's and corporate business processes for better coordination of activities; deploying corporate shared services in its environment; and providing adequate visibility into its key operational metrics.
  • The existing business system may not be able to scale to meet the subsidiary's future volume and/or process complexity requirements.

Such subsidiaries should be flagged for implementing a new business system. As a new business system at these subsidiaries is implemented, it should also deploy the system's distribution and logistics capabilities to automate those processes.

Model Decision-making

Once the subsidiaries that need new business systems have been identified, the next step is to explore if the existing corporate system can be implemented at these subsidiaries. Your governance model, together with the business requirements of the subsidiaries, should drive the decision.

If the governance model calls for more autonomy in the decision-making and execution at the subsidiary level, then these subsidiaries should implement a separate business system. Since the IT budgets at these subsidiaries are much smaller, a Software-as-a-Service (SaaS) business system may be a better path.

Such a deployment model is called a two-tier enterprise resource planning (ERP) model, where corporate and subsidiaries have different ERP systems by design. Once a two-tier ERP model is established, then business systems that meet the budget — as well as functional and regulatory requirements of the subsidiary — can be shortlisted.

Key criteria for selecting a subsidiary system under a two-tier ERP model include:

  • Meets subsidiary's functional and industry requirements, including distribution and logistics capabilities
  • Enables subsidiary to easily and rapidly make changes to its businesses processes to adapt to changing local market requirements
  • Meets corporate requirements for local and global compliance
  • Low cost of ownership — ideally a SaaS-based model
  • Off-the-shelf integration with corporate ERP system

By automating distribution and logistics processes of subsidiaries via an integrated business system using a two-tier ERP model, a large company can increase the distribution and logistics operational performance at these subsidiaries, improve customer order delivery metrics, and gain an ability to compete in the local markets more effectively and efficiently.

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