Understanding the two-tier ERP strategy and how to implement it

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If your company is in the process of an expansion or going through mergers and acquisitions; if it has numerous subsidiaries; or if there are multiple branches spread across a vast geographical location – you need to implement a two-tier ERP strategy.

The main reason for implementing a two-tier ERP strategy is that the headquarters and the sub-branches have dissimilar reporting and compliance structures. So, if you implement the same Enterprise Resource Planning (ERP) system to encompass the needs of each business house, you will knit a web of difficulties that may lead to chaos.

This is where a two-tier ERP strategy will come to your help.

What is a two-tier ERP strategy?

In the two-tier ERP strategy, the headquarters use tier-1 ERP software customized to manage critical business functions required to operate a large company. On the other hand, the subsidiaries or smaller branches use a less resource-intensive tier-2 ERP software built to handle their day-to-day needs.

In a two-tier ERP setup, the information flows from tier-2 to tier-1, allowing for master data management. This setup acts as a single source of truth that provides access to crucial business data to each business stakeholder across the entire enterprise.

The responsibility of each tier varies, but generally, tier 1 handles core business functions like supply chain, finance and accounting, and human resources. Whereas tier 2 handles other tasks like marketing and sales, manufacturing, and internal communication specific to a particular branch.

Why are companies using a two-tier ERP strategy?

The two-tier ERP strategy became popular when businesses began implementing customized ERP solutions. The following reasons explain why:

a. Customized ERP solutions are less expensive than traditional ERP systems.

b. Customized ERP software takes less time for implementation.

c. Customized ERP systems are built for solving specific business challenges.

On the other hand, traditional ERP systems are burdened with complexities, require extensive configuration requirements, need rigorous technical training, have massive implementation time, and are very expensive.

Due to these factors, many enterprises thought it’s far more economical to take the two-tier approach instead of replacing the tier 1 ERP or moving the subsidiary or acquired organization onto the existing ERP system.

Why investing in a Two-Tier ERP system is beneficial for you?

Suppose your company plans on expanding its operations in a different country. You start by acquiring a small company that has a firm footing in that country. This company has been using highly customized ERP software for managing its business functions.

Now, if you decide to impose a Tier-1 ERP system on this newly-purchased company, you will have to face severe challenges, both technical and from a human resource point of view. Employees often resist implementing a new ERP software as they need to spend more time learning the nitty-gritty of the latest software. In the worst-case scenario, the newly acquired company might be using a very basic ERP software that cannot integrate with your company’s tier-1 ERP software.

What are the benefits of using a two-tier ERP strategy?

There are numerous benefits that you can gain by implementing a two-tier ERP strategy. Some of them are as follows:

1. Customize according to business needs.

A small business unit may build products and serve audiences that might be starkly different from those of the primary business. For example, Microsoft makes operating systems, whereas Bethesda, a subsidiary of Microsoft, excels in developing fast-paced shooter video games. Both have very different software requirements and target segments. It would be best if they use a tier-2 ERP system for Bethesda to help drive greater efficiency, speed, and profitability.

2. Reduce operational expenses.

Big enterprises with a large number of subsidiaries can save high costs by implementing a two-tier ERP system. The following points explain how:

a. By having multiple subsidiaries on the same tier-2 system, the parent company can save implementation, maintenance, and upgrade costs.

b. The tier 2 ERP system can share IT resources with the corporate office, which means that the subsidiary can reduce its IT headcount and redirect its workforce towards mission-critical tasks.

3. Accommodate local needs.

Subsidiaries, especially those located in foreign countries, need a system that accommodates different currencies and languages and must comply with local laws. Also, there are subtle cultural, regional, and ethnic differences that dictate the functioning of subsidiaries. A tier-2 ERP system helps address local requirements even if the tier-1 ERP doesn’t.

4. More user-friendly experience.

Tier-1 ERP systems have a steep learning curve that requires employee participation. Unfortunately, most employees resist investing time and effort to learn how to use an ERP system. On the other hand, tier-2 ERP software is user-friendly and requires less time to learn. This way, companies can also cut down on training costs.

Conclusion

If you have multiple branches spread worldwide, then you must adopt the two-tier ERP strategy. It will allow the subsidiaries to account for differences in currency, local compliances, language, and culture conveniently. You can decrease operational expenses by reducing IT headcount and delivering greater efficiency, speed, and profitability. Since it’s easy to learn the nitty-gritty of a two-tier ERP system, you can also save training costs.

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