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ERP Guide : Model-building strategy

Tutorial by:      Date: 2016-05-05 05:17:44

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The third principle on which a decision has to be taken before the ex ante evaluation of an ERP system starts is the model-building strategy. ERP is often used by organizations that have multiple geographical locations, product-market combinations or business units. Such organization can either build one organization-wide ERP model, or develop a number of ERP models that are specifically tailored to the requirements of one location or market.

Three well-known model-building strategies exist. The largest degree of standardization is achieved with the so-called one instance strategy. With this strategy, all ERP users work with one model in which the business logic is configured, independently of their geographical location, the market they serve or the business unit they work for. They also use the same physical IT architecture, and they work in the same ERP database. In the one instance strategy, standardization is enforced by the ERP system itself. This strong form of standardization is suitable for organizations that have limited variety in their businesses, or for organizations that are willing to impose the requirements of one location or business unit on all users of the system.

A second approach to standardization is the kernel strategy (or: template strategy) for model-building.

This strategy has two steps. In the first step, a basis ERP model is developed: the kernel model. This normally takes place on corporate level or by staff divisions. The kernel often contains the financial chart of accounts that is the basis for all financial processes in the organization, and could also contain standardized customer, supplier or product codes. In the second step, each geographical location or business unit extends the kernel with its own business logic. Examples of such extensions are local legislation or local manufacturing processes. Standardization of the kernel can be enforced by some ERP systems, but for other systems procedural agreements will have to be made to safeguard the standardization of the kernel.

This model-building strategy is suitable for organizations that want to have a well-controlled centralized financial consolidation process as well as lexibility at local level to foster entrepreneurship.

The third model-building strategy is the multi-model strategy. This strategy does not enforce standardization. Each geographical location or business unit is free to model its own business logic. It is clear that the advantages of the characteristics of ERP, data integration and best practices, will not be realized on organization-wide level when this strategy is selected. It can still be a sound strategy, especially for companies that regularly sell or spin of subsidiaries, or for conglomerate companies that have business units that have limited overlap and opportunities for synergy. The multi-model strategy is however not always a conscious choice, but can also be the result of a failed enforcement of a one instance or a kernel strategy.

The model-building strategy is an important boundary condition for an ERP implementation. The effort that is needed for model-building is dependent on the availability of a template and the degree to which this template is suitable for the business processes that the ERP system is expected to support.

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