The company has chosen to make a substantial investment in the Easy Pay Enterprise (EPE) platform that acts as an Enterprise Application Integration (EAI) layer that serves to integrate the many processes areas where accounting and human resources are required to complete internal tasks. EPE is actually an integration layer suite of applications that is tailored only to shared common corporate functions. To date, Smorgon has found this a useful integration suite for their Shared Business Services architecture. Batch-oriented integration of key system updates and financials from operations must be consolidated, analyzed and stored on the SAP R/3 instance first. The integration between EPE and the SAP R/3 instance is not considered reliable due to the strict formatting and naming convention features SAP uses and that the EPE cannot exactly match on all transactions. As a result, Smorgon continues to spend heavily on consulting and integration projects between EPE and other systems, yet is not seeing the full impact of its investments as of yet. The inaccuracies in EPE vs. SAP system data are another cause for a declining level of credibility for higher it spending within Smorgon.
Analysis - Having began in steel manufacturing and progressed into Australia's largest distributor of steel products, Smorgon today find itself with an it architecture including ERP system strategies that are more suited for manufacturing than distribution. The strategies of the company have moved on, yet the ERP systems are stuck in the manufacturing past. From a strategic perspective this is slowing the company down from better serving its customers. Excellent evidence of this transition of Smorgon from being manufacturing to distribution centric is in the decision of senior management and the board of directors to place their largest ERP instance, an SAP R/3-4.6c installation, within the Smorgon Distribution Division. The fact that both the Recycling and Reinforcing Divisions also have legacy ERP systems installed, some with little integration beyond basic transaction reporting using WebMethods adapters and connectors that may or may not scale for the transaction traffic involved in each division, and one can see how limited the it infrastructure is today. What is needed is a re-architecting of it investments including the many disparate and sporadically connected ERP systems into a demand-driven network that better serves, suppliers, buyers, customer and gives Smorgon's management team insights into how to excel on the five dimensions defined in the introduction of this case study.
Transforming Smorgon's it Strategy
Smorgon's ERP strategies need to be revolutionized, and further than that, it needs to be transformed from a disparate set of high maintenance applications into an architecture that propels the company to its strategic objectives. Figure 1 is a graphical representation of Smorgon Steel's product flow originally presented in June 2006 by Ray Horsburgh, Managing Director & CEO Smorgon Steel Group Ltd.
Figure 1: Smorgon Steels' Product Flow and Value Chain
Several key insights emerge after an analysis of this product flow. First, Smorgon is high dependent on its suppliers, and the coordination with its supply chain partners, including buyers and suppliers is absolutely essential for the company to achieve its inventory turns targets, a key performance indicator Smorgon focuses on. Second, synchronizing with customers both those through distribution and those purchasing directly, is another critical area of their business model. The role of forecasting and sales analysis applications and tools are used for providing demand visibility for Smorgon to have enough time to react to changes in demand. Third, the company actively uses business trends syndicated research and industry research to anticipate changes in demand over time. Fourth, the role of CRM systems is in providing a 360-degree view of the customer and making progress towards the strategic priority of becoming more customer-focused and increasing market share. Fifth and most critical is the reliance the company places on analytics.
Measuring Business Strategy and ERP Performance with Key Metrics
These are the measures of success or failure the company uses relative to its business goals and they are listed below. Smorgon's it department tracks the following key performance indicators regularly and they are considered the measures of value that the ERP systems in the company deliver. It must be noted that each specific ERP system of the company will report only on its own activity, the consolidation of all activity is necessary to see the truly strategic view of the company. This is a critical area for future improvement, as these metrics in essence only measure the effectiveness of Smorgon's business that they report on:
Inventory Turns - Defines the speed at which 60,000 different products that comprise the Smorgon Steel product suite turn in a given time period. Typically inventory turns are measured monthly.
Cycle Time - the time it takes to complete an order. As the financial statements and the UBS Presentation presented in July, 2006 show, Smorgon is seeing specialized and customized products become one of the fastest growing parts of their business. This translates into the need for more efficient use of Business Process Management (BPM) to ensure higher rates of accuracy and reliability in meeting orders.
DPMO (Defects Per Million Opportunities) - a well-known supply chain metrics, the DPMO originated with Six Sigma process techniques and refers to the number of defects per million in any given production run.
Fill Rate - the rate at which customers' orders are filled and then delivered via the distribution channels Smorgon relies on. This is a key performance metric as it relates to the efficiency of Smorgon in managing and having visibility throughout its supply chain.
Back orders - the number of orders by product that could not be immediately fulfilled and needed to be scheduled for production later in the financial period. This often occurs due to stock outs, rejected lots of goods, and lack of visibility throughout the supply chain. Minimizing backorders is critical for driving down operating expenses, and as a result Smorgon invested heavily in Manugistics supply chain planning software. To date due to lack of integration however with ERP systems, the results have been mixed.
Demand Forecast Accuracy - as can be seen from Figure 1, the essence of the Smorgon Steel product flow is based on getting accurate demand forecasts from both direct and distribution or indirect customers. In the re-definition of the Smorgon it architecture to make it more focused on the needs of the business, the need to become more demand-driven and demand sensing is obvious.
In addition the company tracks the customer satisfaction, all the key financial metrics and publishes them as they are publicly-traded company, performance of suppliers against their requirements, supply chain management costs, and logistics performance.
Smorgon's Approach to Evaluating ERP Contribution to Strategies
Today Smorgon relies on the series of metrics as defined, yet for it to align more closely to, and become a greater contributor of the success of strategic objectives, there are major changes needed. With efficiency of operations and profitability being the two most watched series of metrics the company uses, it's clear that much more could be done in evaluating the contribution of their ERP systems. What's needed next isn't an entire series of analytics with real-time dashboards, but a rejuvenation of the role of ERP systems in the company overall. The company needs to mobilize them to become more focused on the supply chain nuances that affect their business, and in turn they must also focus on the demand-driven aspect of their product flow. As the total value chain of Smorgon is one marked by high velocity, the company needs to re-architect its processes to be truly demand driven. AMR Research originated the term Demand-Driven Supply Network and through a series of studies of the world's top-performing supply chains, learned that a maturity model emerged and demand network optimization was possible. Figure 2 shows the four layers of the DDSN Maturity Model from both a process and information capability stack perspective. From reacting to demand through orchestrating it, there is a corresponding progression of integration and the ability to shape demand. This is exactly what the ERP systems within Smorgon must do for the company to be competitive in the future.
Figure 2: AMR Research's Demand Driven Network Optimization Model
Strategic Use of ERP
As Smorgon Steel is about to be acquired by OneSteel as of this writing (October, 2006) putting the strategic use of ERP and the disparate structure of these systems into an urgent status for both companies. Smorgon and OneSteel will have nine months to get these systems integrated and working with each other to ensure no downtime for either business. Nine months is the typical amount of time required for full ERP system integration and about how long successful mergers take to switch over to a new single system of record.
In light of the merger in process, the strategic use of ERP needs…