ERP Modernization: Evaluating Benefits and Challenges in the Chemicals Sector

The chemicals industry is rapidly transforming to address emerging business needs (e.g. building sustainable products and operations, moving to a B2B2C model etc.) and more general challenges such as rising global competition and supply chain disruptions. At the heart of such transformation is ERP modernization and the move towards the intelligent enterprise.   

The industry, especially in North America, has constantly leveraged mergers, acquisitions as well as spin-offs for portfolio optimization and to drive growth and innovation. This approach has brought some unique challenges specific to the industry, primarily attributed to the inherited processes and data models over the years. 

As many organizations have realized, SAP S/4HANA transformation offers companies a good opportunity to re-imagine business models and benefit from a best practices-based reference architecture.  As we all know, a major ERP program can be daunting, especially given the weight inherited complexities and the inherent risks of a large transformation program. 

 In this blog, we will dive into those specific challenges and how SAP S/4HANA transformation can be approached in a manageable way that will deliver quick wins for the business. 

Let’s look at the top 6 key focus areas that will help ensure a smooth transition to SAP S/4HANA and help companies benefit quickly from the implementation

• Harmonize your Chart of Accounts (CoA) before ERP transformation

  CoA is a foundational element within the ERP enterprise structure and is the basis for financial and management reporting. Due to the prevalence of M&A activity in the chemicals industry, CoA harmonization is an integral step prior to transformation. This is because over time, with changing business models, acquisitions, legal requirements and accounting regulations, the enterprise structure gets too complicated, and the CoA especially needs to be harmonized.  

  CoA harmonization prior to a major transformation will be a huge advantage. It will streamline reporting, simplify the period end closing activities and help standardize processes. There are many landscape transformation tools available to help automate and derisk this effort.

• Build the foundations 

  During any M&A activity, transition time is very limited and more often than not, source data is brought forward to the ERP without much transformation. For many chemical companies, this has meant huge increases in ERP data volumes over time, as well as poor data quality.   

  Data transformation thus needs to be an integral part of the overall transformation and must be addressed upfront. The good news is that many tools now exist to automate many of these tasks, and much of this work (e.g: data archiving and rightsizing, master data clean-up, tool selection for data migration, data transformation, etc.) can be done in a preparation phase prior to the transformation program. 

  Setting the right foundations early will also have the knock-on benefit of improving current system’s use and performance. If system conversion is your chosen option for the SAP S/4HANA move, having a reduced data footprint will help optimize the downtime during cut-over as well.

  Another important foundational step is to review the application architecture and identify opportunities to sunset legacy applications that are integrated with SAP.  Some legacy applications may be nearing end of life or may have been custom developed for addressing specific functionality that is now likely available in SAP S/4HANA. Implementing Lean IX (Enterprise Architecture Management tool) and leveraging it to do an application portfolio assessment is recommended prior to the transformation. This will help you maximize SAP investments.

• Clean up unused – or unneeded - customizations

   Chemicals is one of the top 10 industry segments that uses SAP ERP heavily, with a huge global ECC install base. Many of these legacy SAP ERP systems were implemented 20+ years ago, and most have been heavily customized. 

  Over the years, business models and processes have changed significantly, and many of these customizations are likely no longer needed or can be replaced by standard SAP best practices.

  Reviewing usage of these customizations and cleaning up unwanted custom objects helps in both the short term as well as during transformation. At HCLTech, we have developed our HANA Smart tool that identifies which custom code to retain/retire based on certain characteristics.

  While embarking on a transformation journey, it’s recommended to follow a “Fit to Standard” approach that is coupled with an organizational change management initiative to drive better business adoption. Frameworks like HCLTech’s FENIX 2.0 can be leveraged to design a clean core / lean core S/4HANA solution.

  Investing in code cleanup upfront can lower your TCO (as part of a clean core strategy), and SAP S/4HANA along with side-by-side extensions in SAP BTP will bring real value in terms of integration of third party solutions and the development of differentiating solutions.

• Re-evaluate your legacy Supply Chain solutions 

  Legacy Supply Chain follows a linear approach - there is no real time data available to make faster decisions, so the traditional supply chain applications don’t have predictive capabilities and there is no real time collaboration with partners. This impedes supply chain agility, which is keenly felt during disruption, as evidenced during Covid.

  SAP edge applications are now available, which provide real-time data collaborating with supply chain partners – 3 PL’s, freight forwarders, service providers and suppliers. Many of these business network solutions are now available as a part of the SAP RISE reference architecture and should be considered while transforming the core.

• Identify and fix process gaps

  Due to continuous M&A activity, organizational changes and customization in the legacy ERP, processes at many, if not most, chemical companies have ended up deviating from industry best practices over time. 

  Prior to transformation, it’s important to identify process bottlenecks and fix them. SAP Signavio has both process mining and process modelling capabilities, which can help streamline process as well as build best practice-based future state process models. Process intelligence also helps identify automation opportunities. Finally, leveraging tools like BTP Build Process Automation ill help business users automate workflow processes without writing any code.   

• Organizational Change Management (OCM) – Make this a “business” program from the start

  One of the primary reasons for delays in transformation programs is the concern around organizational change management. Different types of personas use the ERP and across the globe, the maturity level of the user base will vary. Especially with the new reference architecture, the new UX, new analytics architecture and the fit-to-standard approach, change management is not a nice to have, but rather a must-have activity for every organization embarking on a transformation. 

  Below are examples of ways OCM can be done effectively. 

  1. Follow a “Show and Tell” approach for the design workshops - helps business stakeholders understand the solution early and better 
  2. Proof of Concept Sandbox Setup - can be leveraged for learning SAP S/4HANA before starting the program
  3. Leverage Qualtrics-based surveys to assess user maturity and deliver tailored training programs
  4. Establish early communication from leadership on the value that SAP S/4HANA will bring for each of the workstreams and key personas.

Key implementation considerations

• Central Finance (CFIN) Deployment: A “quick win” on the path to transformation

  For companies with multiple ERP’s, CFIN is often thought of as a first step towards transformation. It’s a great starting point for companies that are not ready yet to upgrade due to the number of ERP systems involved or the time and investment it would take to build a global template and roll-out across all regions and business units. CFIN provides centralized processes and reporting capabilities, which is critical for the finance organization. 

  But it should be noted that this deployment approach is a step in the right direction, but not the destination itself. To reap the full benefits of the digital core, ERP transformation still needs to happen.

• Consider a move to SAP S/4HANA Cloud

  In the past, companies have hesitated to move to SAP S/4HANA due to cost, complexity and bad memories of over-run ERP transformation programs. 

  However, by moving to SAP S/4HANA, Chemical manufacturing companies running on ECC or non-SAP ERP can benefit tremendously from the newer functionalities such as demand and supply segmentation, advanced available-to-promise, MRP Live, SAP S/4HANA EHS, and product compliance. AI Innovations are also now embedded within S/4HANA and line of business (LoB) solutions.

  A thorough assessment will be needed to determine the right path for implementation (brownfield, greenfield, selective transition) as well as to decide on the approach (phased vs. big bang) and timeline. The good news is that there are ways to address the complexities and reduce risk of implementation, including:

  1. Better implementation methodologies; that are more suited to today’s digital transformation programs (Activate, RISE with SAP methodology etc.)
  2. Multiple implementation options are available
  3. Gen AI has been embedded in the implementation lifecycle - for e.g. At HCLTech, we have developed automated code development and testing use cases to accelerate implementation lifecycle 
  4. Availability of Industry Cloud solutions 
  5. Reference architecture to help customers build a strong foundation.

• RISE adoption

  SAP RISE subscription, as many of us know, bundles software licenses, infrastructure and technical managed services into an all-in-one SAP contract. More than just a contracting model, RISE offers benefits to explore key SAP solutions such as Ariba, Logistics Business Network, AIN, BTP and Signavio, which are all very relevant when you look at end to end business transformation. Customers also have the choice to request a technical upgrade once a year to keep up to date with the latest innovations. 

  Even though RISE is now a mature offering, many customers are still confused by what RISE is – and isn’t. My advice would be to engage an experienced partner early and use them as an advisor during your evaluation process so you can avoid common pitfalls, establish realistic timelines, and maximize commercial benefits.

  Customers need to understand the difference between RISE vs. traditional SAP S/4HANA implementation on a hyperscaler, fully understand the SAP RISE bill of materials (BOM), and how RISE can drive Total cost of Experience and Total Cost of Innovation (beyond the traditional TCO), and approach RISE holistically (not just as a technical lift-and shift to the cloud).

Conclusion

Given that M&A activity is central to the business growth strategy of many organizations in the chemical industry, it is essential that ERP modernization becomes a strategic goal.

While it can be hard to think about transformation when the focus is to integrate new acquisitions within very tight deadlines, ERP modernization eventually has to be addressed to derive business value and to stay ahead of competition. 

Because the truth is that Transformation will get harder as more M&As happen and integration is done on legacy ERP. However, with proper planning and addressing the above-mentioned areas, transformation in chemical companies can be completed successfully, lower ERP TCO, address data challenges and ease future integrations.