What is a two-tier ERP system?

by Sam Paternoster

A two-tier ERP system is a strategy that many large, Fortune 1000-type companies use to manage costs and handle expansion of their business. As companies grow, it can be difficult to integrate and iterate on their tech stack. When you have complex software, it can be difficult to adjust for the changing needs of your business.

A Constellation Research survey found that 80% of it's respondents would find it too expensive to expand their existing ERP-system to tackle new challenges. Two-thirds also highlighted that their business had their own niche or local requirements in different branches, making it even more difficult to manage all of them in one system.

Through these issues emerges the two-tier ERP solution. In this article, we'll be exploring what a two-tier ERP system is, and how ERP software providers such as NetSuite have rolled out solutions like NetSuite OneWorld to make business expansion less complicated.

What's an ERP system?

First things first, it's worth covering just what an ERP is before delving into two-tier ERP systems.

ERP stands for 'enterprise resource planning'. In essence, an ERP system is there to unify the processes across multiple departments of larger organisations. This allows them to maintain their internal processes whilst having them accessed through a single interface.

There are some immediate and obvious advantages to ERP systems, such as:

  • Increased Efficiency: automating business processes can speed things up and make it easier for teams in different to communicate between subsidiaries and the main organisation.
  • Save Costs: Using an ERP can save on costs for both software and headcount by making it easier to access data from all departments from a single interface.
  • Expanding Business: An ERP can ease the pain points of opening subsidiaries in new territories, making expansion a lot smoother. We'll cover this in more depth later in the article.

There are a lot of recognisable names operating in the ERP space. NetSuite, Sage and Microsoft are just a couple of examples, and there are many more out there. Each ERP software has its own benefits and will be right for different businesses, so its worth cycling through and comparing different options if you're in the market.

Now we've covered the basics of what an ERP is and does, lets take a look at how a two-tier ERP system works, and the advantages of using one.

How does a two-tier ERP work?

The idea of a two-tier ERP is pretty simple.

The two 'tiers' manage business operations on different levels. Say you're running a huge, Fortune 1000 company. You've got divisions in a dozen countries with thousands of employees, and you've chosen NetSuite to help you grow.

Your Tier 1 ERP is likely to focus on core operations that are relevant across the entire company. Examples of these type of operations are HR, payroll and finance. Tier 2 focuses on business operations that may be more specific depending on which division - either departmental or regional - such as sales and marketing.

Data flows naturally from your Tier 2 system back to Tier 1. Each tier can be set up differently and use different software from NetSuite's arsenal to meet the specific needs of the tier, whilst ensuring you still have a single point of access for all the data you need.

So, what's the advantage of running two systems?

As we touched on earlier, this can be a big advantage when expanding your business. It's relatively easy to set up a Tier 2 system and feed the data from a new subsidiary back into your core operations in Tier 1. Comparably, integrating your new subsidiary into a single tier ERP can be a laborious process. Tier 1 systems can be more robust and intimidating, built for enterprise customers to handle complex business operations. Comparatively, Tier 2 systems tend to be easier to learn, and are adaptable to new processes.

A company may want to use a two-tier ERP system when it opens new subsidiaries in new locations. We covered this in our recent blog about the biggest NetSuite customers, exploring how ASICS used a two-tier system to help expand into Asia. For ASICS, it was far easier to set up Tier 2 systems in the destinations they were expanding into, as opposed to integrating into their more complex Tier 1 system.

Below are some of the benefits of using a two-tier ERP system to aid expansion:

  • Having your Tier 2 system able to handle different currencies and languages. This saves a lot of time compared to adding considerations for new locations to a Tier 1 system. Location-based advantages can extend beyond this too, such as tax compliance.
  • A subsidiary could be dealing in a more niche market than it's main organisation. This could be selling a particular product that's outside the scope of what the company usually sells. Using a Tier 2 system can still feed back vital information to the centralised operation in Tier 1, without having to make huge adjustments to your main system.
  • If you're acquiring a new business, it can be time-consuming and a lot of effort to adjust your system to allow for them. Having a simpler ERP feed the new data into your Tier 1 ERP is a lot quicker and easier, whilst still allowing for master data management.

Is a two-tier ERP right for me?

Two-tier ERP systems befit very specific type of businesses. Unless you're doing huge numbers and have divisions in a number of different regions, it's unlikely that this is something you'll look at implementing.

However, it's always worth keeping an eye on the future. If your business is growing, it's worth considering a two-tier ERP system if you're looking to branch out soon. Our example, ASICS, found they were able to open new divisions in both Singapore and India within 6 months thanks to the flexibility afforded to them by NetSuite OneWorld. Even if expansion isn't yet on the horizon, it's always worth thinking about a solution that will make it easy when the time comes.

If you're interested in getting a two-tier ERP system implemented but don't know where to start, we recommend checking out this NetSuite strategy kit for a bigger breakdown of how it might work for you. You can also see other NetSuite customer stories on their website to find examples that may be more relevant to your business. Finally, if you're enjoying our NetSuite and ERP focused content, why not take a look at our blog on why you need shipping automation software for your NetSuite orders?