Assignment: Global Enterprise Logistics By: Liam Cotter Student no. 0506318 (Bolton University) Date of Submission: 22nd. November, 2007
Case study : PCM Corp.
Introduction.
If logistics in essence, is the management of the flow of materials and information, then operations management techniques are the tools or management principals and practices by which these goals are achieved.
Taylor (1997)1 in his book describes logistics as: “the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in process inventory, finished goods and related information, from point of origin to point of final consumption, for the purpose of conforming to customer requirements”. Krajewski & Ritzman (2005)2 describes operations management as the: “ systematic design, direction and control of processes that transform inputs into services and products, for internal as well as external customers”
Using both these principals or criteria as the basis for a root and branch review of the current logistics and operations management of PCM Corp. I will endeavour to prepare an analytical report that will streamline the company’s logistical operations to maintain it’s competitive advantage over it’s competitors, in order to best prepare it for the dynamic trading environment of the 21st. century.
An important element not overtly mentioned already is the question of strategy and the importance of strategic decision making within an organisation and it is the case that despite the best logistical and operations management techniques available, a company will flounder, if overall strategic direction is not present.
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1. David Taylor, Global Cases in Logistics & Supply Chain Management, ITBP, 1997
2. Krajewski & Ritzman, Op. Management, (7th. ed.) Processes & Value Chains 2005
The modern competitive environment is not static but rather, is constantly evolving and to be best placed to plan strategically for this dynamic, the virtually instantaneous availability of information is crucial to proper strategic decision making, hence the linkage between the information that flows from an efficient “value chain” 3 and strategic decision making.
Simply put, a company’s strategy is the method by which it’s goals are defined and operations management is the means by which these goals are achieved, while logistics is concerned with efficient supply chain management. Taylor (1997)4 defines the important features of logistics as being concerned: A) With the movement and storage of materials. B) With managing the information flows that underpin the flow of materials. C) It’s scope ranges across the whole supply chain from point of origin of raw materials to final consumption of finished products. D) It requires a single logic to plan and organise this flow of materials throughout the supply chain. E) It has two key objectives: (i) achieving appropriate customer service standards and (ii) doing so in a cost effective manner.
The historical and traditional view of logistics (and certainly the predominant view within PMC Corp.) was that it was simply a cost centre only within the organisation and was therefore, the necessary consequence of trading in the business environment.
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3. Michael Porter, Competitive Advantage, New York Free Press, 1997.
4. See note 1
As logistics developed, so did the realisation that integration of the supply chain, which essentially meant that by combining the materials management (inbound) with the physical distribution (outbound) of the supply chain, would result not only in significant cost savings but also the possibility of a significant competitive advantage accruing.
In addition, the possibility that logistics could also be a revenue generator within an organisation, based on the ‘value added” of the resource. Fuller integration of the supply chain will be a particular area of focus for the purpose of this submission as it relates to PCM Corp.
The main driver of this sea change in logistics would probably not have come about to the same extent, without the development of various information technologies that characterised the developing IT sector towards the tail end of the 20th. century. Dramatically improved communications in turn lead to the various functions within logistics and the supply chain, to start to work together much more effectively than previously possible.
Indeed, this principal of integration of the supply chain as proposed by Coyle (1996)5 and as depicted in figure 1, is a fair representation of the position that currently exists at PCM Corp. except that PCM Corp. have not taken the final step of total integration of the supply chain, a situation that requires immediate review and analysis. Figure 1 is also useful in assisting the visualisation of the myriad of functions required within each department and the current requirement to have logistical co ordination between each and all departments and their functions.
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5. John Coyle, The Management of Business Logistics, 6th. ed. St. Paul West, 1996
Although localised computer networks did exist and functioned well within organisations locally, it was the advent of the internet that allowed these localised networks to be integrated and the process of true globalisation to develop apace. Very often however, localised “legacy” technology was not compatible with other networks, therefore even departments within companies could not properly integrate electronically, quite apart from the IT difficulties experienced with B2B communications.
Generally though when IT systems were employed, not only was there was a dramatic reduction in the time consumed in manual paper trails generated by the supply chain, there was also a very significant increase in the speed of flow of information along the supply chain, in both directions, the significance of which I have already touched on.
It is the vast amount of manual and labour intensive interventions required throughout the PCM Corp. logistics life cycle, which is to be one of the concerns to be addressed in this case study. The importance and significance of operations management in terms of it’s cross functional dimension within an organisation cannot be over emphasised and figure 2 shows how operations management fundamentally impinges on all other divisions within an organisation as outlined by Krajewski & Ritzman (2005)6
On the basis that processes, whatever form they take to which value is added, are the basic work unit within any company and it is the linking or joining together of all the processes within an organisation (and it’s service providers) by means of a GEL solution, that will result in a lean value chain.
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6. See note 2.
The key here is that all processes (from whatever department they originate) are a drain on a company’s resources and should only be undertaken provided they add value, to the final product.
1.) The essential logistical features of PMC Corp.
PMC Corp. produces a wide range of packaging products from several North American manufacturing facilities to supply customers in the local North American market as well as the European market. Suppliers are based in North America and Asia. The logistics unit is reasonably well developed in that it already manages all of the outgoing distribution for all of the business divisions and some of the inbound materials management as well.
The logistics unit is also generating revenue by providing out sourced logistical services to other manufacturers but the unit is being seriously hampered in it’s work by the lack of a state of the art single platform GEL technology system, an over reliance on labour intensive manual systems, and outmoded ROI (return on investment) TMS as opposed to a more dynamic ROV (return on value) Traffic Management System. Although shipment optimisation is occurring, it is based on a manual system operated by experienced planners which does not take advantage of the cost savings that a consolidated logistics platform would provide.
Also, the complete absence of in-transit inventory visibility, is a major disadvantage with the value added advantage of such a system leading to greater customer satisfaction and also allows a logistics planner to have early warning system, so he might “detect and recover” before any customer relations damage is done. It is clear for the example given, that the logistics team are highly skilled and motivated and are achieving quite significantly with limited support services in terms of technology and a lack of overall strategic planning across the various divisions.
Logistically, further development is not possible without the difficulties outlined above being addressed by a single platform GEL solution which will have in general, a more outwardly looking approach, which will use customer satisfaction, competitive advantage and generated revenues, as it’s yardstick of corporate success, going forward.
2) Stated and assumed difficulties.
Perhaps the most serious difficulty facing the company is that it is loosing competitive advantage in this current hi-tec marketplace by not evolving it’s value chain or it’s trading partner ecosystem, as it’s competitors seem to be doing apace. This is a consequence of a lack of sufficient, high quality strategic planning/decision making across the company’s various business divisions The lack of proper strategic planning and the erosion of the company’s competitive advantage are if you like, the assumed difficulties, which are at the core of the present crisis within PCM Corp.
The manual and labour intensive intervention required, a process that is seriously error prone and lacks visibility in real time, is the problem at the heart of the current logistical malaise and as already stated, the absence of accurate, instantaneous information being generated by all aspects of the value chain, is making dynamic strategic decision making virtually impossible in the current situation. This is a problem of literally global dimensions, particularly given the geographic spread of both suppliers and customers across three continents and the high volume of materials and products within the system.
The current lack of inventory visibility is an issue of particular concern, as is the dated technology and obsolete logistics systems currently in use, which are neither scalable or compatible with similar systems, within the group’s activities. The difficulty in getting high volume shipping is at the core of the huge cost of transport, with an annual cost to the company of $90 million per year and it is the targeting of these transport costs with a GEL solution that will optimise the logistics and value chains. A ten to fifteen percent reduction in this cost within three years, by means of a phased rollout of a GEL solution, will significantly increase the company’’s competitive advantage and customer satisfaction rating.
Traditionally, PCM Corp. would have seen this investment in technology as a short term cost minimisation process whereas the new emphasis is an ROV model, with revenue growth, competitive advantage and customer satisfaction being at the heart of this new dispensation within the company. Value chain maximisation is to be the order of the day, within PCM Corp. going forward.
3) Areas of improvement.
Traditionally, PCM Corp. has approached it’s manufacturing, transport and distribution in a fragmented way and was not holistic in it’s general approach and it was clear that certain fundamental strategic changes to the business model had to be made. For instance, the company manufactured all of it’s 38 products at each of it’s three facilities in the USA at Houston, New York and Seattle. Strategically, this approach to manufacturing is not sustainable into the future and it is envisaged that each manufacturing facility will specialise in a given number of products, with all products being available to the other facilities for local distribution, via the internal logistical chain.
I refer to figure 3, which shows the historical (fig.3A) and the proposed position (fig 3B) within PCM Corp. when the GEL platform is fully established after a three year phasing in programme. Ten of the company’s products will be manufactured at the New York facility, while 12 will be manufactured in Seattle and a further 16 products manufactured at Houston. Furthermore, it is envisaged that all goods inbound from Asia will be consolidated, in conjunction with our suppliers, at a clearing station near Shanghai for onward shipping to the USA.
Materials inbound from Asia will all route through Seattle and will again be available to all three manufacturing facilities, via the internal logistical network. Because of the increased capacity of the logistical system, some consolidation of the goods outbound will also be achieved and it is proposed that New York, like Seattle on the inbound side, will become the sole point of export of all 38 products to Europe as well as being the hub of the domestic distribution logistical system.
The above revised strategic plan will now be examined in the context of consolidated logistics processes, scalable platform, shipment optimisation, service provider collaboration, in-transit visibility and financial settlement which are some of the few hard and soft benefits that would accrue from a GEL solution. It will be appreciated that certain strategic decisions were necessary, as outlined in fig. 3B, in relation to the current business model, to full maximise the benefits of a fully integrated GEL system. Whereas the previous focus of attention historically was mainly concerned with the development of internal processes, a more global view requires strengthened interaction between internal needs and the external supply/demand chain.
Instantaneous “real time” management across multiple geographically diverse locations, is an imperative (between service providers, strategic partners, suppliers and internal assets) can only be achieved efficiently I would submit, by the use of an enabling cutting edge AERP (advanced enterprise resource planning) management tool or a SAP (systems, applications, products) for data processing at each logistical work station within the value chain.
Consolidated Logistics Processes It is vitally important, it the overall strategic planning sphere of any corporation who considers itself up to the challenge of trading (and e trading) in the modern world market, to take the “pulse” of the national economy as well as the world economy.
Manufacturing generally within the USA has in recent years been difficult at best and in decline and in a relatively recent US manufacturing industry report7, it was stated that: “while overall GDP for the U.S. edged up by 0.3 percent, manufacturing production fell sharply by 7 percent”.7
It is in this context and against this background that manufacturers generally had to take stock of all aspects of their value chains and interestingly, it can be equally the risk of hard economical landings or the promise of previously unheard of revenues, that can motivate a company to develop it’s value chain by means of a GEL solution to allow it to operate as efficiently as possible, in good times and in bad. In bad times, to facilitate consolidation and in good times to significantly increase output without the exponential increase in costs.
EDI (electronic data interchange) technology, which has been used by PCM Corp. up to this point in some of it’s operations such as shipping notifications, purchase orders, invoicing) has served the company well to date but is now a dated, legacy technology. The transmission of structured pre-set/predefined formats over private networks is inherently time consuming and wasteful, given the fact that each document requires a translation at each end of the process, from the specific detail of the original document to the neutral EDI format and then back to a format that the receiving terminal can decipher. EDI generally is costly and difficult to implement and complex in use.
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7. The Facts about Modern Manufacturing, National Association of Manufacturers,6th. Ed.
Modern advanced enterprise resource planning solutions use a secure WEB based XML (eXtensible Markup Language) document transmission system which does not require EDI type fixed/rigid electronic document formats. The modern SOA (Service Orientated Architecture) which is an enabling IT technology that performs a specific task, uses XML formatting language and is compatible with every known computer operating system/platform/programming language which essentially allows this systems to have no boundaries within the value chain, which has “real time” performance capabilities.
Access to the secure system can be from literally anywhere via a web page or browser application. While parts and products travel “up” the supply chain, supply, demand and other value chain in information needs to travel in every direction in the value chain eco- system and can be available to suppliers, trading partners, distributors, transportation providers, third party logistics providers, warehousing providers, consolidators, etc. Workflow principals can now be used to automate communications and processes within the “external” value chain as well as the more traditional meaning of workflow processes within an organisation.
For instance, SOA provides the platform for a manufacturer to extend the internal workflow principals beyond a company’s internal processes and could automatically notify a supplier system, via an electronic Kansan 8 “pull” signal to initiate a reordering action to replenish stock , which would simultaneously initiate invoicing, transport/shipping, storage, and other information transfer within the value chain.
The implications for shipment optimisation and service provider collaboration is essentially boundless and limitless allowing a level of co-operation and co ordination never previously possible.
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8. Visible record or “card” system developed by Toyota to control the flow of production through a factory and a system of replenishing production line components.
Scaleable Platforms
The SOA system is designed to have unprecedented flexibility, adaptability and connectivity and provides users of all kinds (human or automated, internal or external) visibility and connectedness without any concern regarding local hardware or software platforms and is the ultimate in scaleable platforms in this respect. It would be wrong to suggest that SOA is one single platform or system but is rather a suite of systems that can be tailored to the particular manufacturing environment. Enterprise resource planning software is available in a suite of software packages which can be fully and smoothly integrated with each other to manage industry specific sales, finance, accounting, e business, customer relationship management, service and after sales functions, supply chain management, production management, planning management among others and potentially can be expanded not only for current IT capability, but future IT capability as well.
This degree of flexibility and scaleability is what drives the competitive advantage within an organisation and maximises revenues while at the same time, maximising the customer relationships., which promote rapid return on investment, while providing accountability on and at every level of the value chain, particularly in DDSN (demand driven supply networks) supply chain environments.
A word about In Transit Visibility
According to a recent report 9 quoting AMR research, the increased visibility which resulted from RFID tagging of supply chain goods, found that: “reduced supply chain costs of between 3 and 5 percent and grew revenue between 2 and 7 percent. . . . .”
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9. Report by Daniel Thomas, IT Management, Enterprise and Supply Chain, quoting AMR Research results, 31st. October, 2002.
Such positive results from a respected research organisation such as AMR, clearly makes a strong case for the implementation of RFID tagging which in a more recent report, indicated that the cost per tag would shortly be about 3p each, in terms of 2005 cost factors. The RFID tags themselves have two basic elements to them, a computer chip and antenna, usually encapsulated within a label and range from being simply “smart labels” to tags that also have a battery incorporated into them and can be either passive, active or battery assisted.
Usually, the battery powers the computer chip only and does not operate to produce FR (radio frequency) energy. When cost is the imperative, passive tags usually suffice but when interrogation of the tags at longer distances is paramount, then the battery powered tags (which are obviously more expensive) are the preferred option. Tags can also be read only or have the read/write capability with un-eraseable information (such as serial numbers) on the “read only” portion and re-writeable information on the “read/write” portion of the tag.
One practical example of such a tag would be a reusable asset such as a shipping container, with the container ID information permanently encoded in the tag and the load it contains recorded in the re-writeable portion of the tag, which would change thousands of times, during the life cycle of the asset. One important aspect of such tags is the security aspect, which makes them virtually immune from hacking or counterfeiting due to the use of encoding algorithms and encryption techniques. The type of RFID tags I propose for use at PCM Corp. should have the following specification, given the nature of our products: Description Frequency Band Range UHF 400 – 1000 MHz 10 to 30 ft. Microwave 2.5 GHz 10 ft. or more.
I would envisage the use of RFID tags to the following supply chain activities: A. Production tracking B. Inventory Control C. Shipping and Receiving D. Asset Management E. Returns,Recall and Recycling management F. Regulatory requirements (USA only) 4)
Evaluation.
In evaluating the above suggestions it must be appreciated that the selection of the evaluation criteria is vitally important to the evaluation results but for the purpose of the exercise, it is generally practical to start with the basic premise that developing one’s value chain by means of consolidated logistics processes, scalable platforms, shipment optimisation, service provider collaboration, in transit visibility and financial settlement methods, will generally be a good thing. In discussing these various systems, the pros were outlined and were mostly obvious in any event. This segment will now look critically at the cons or downside issues associated with these systems.
For instance,there is more than anecdotal evidence to suggest that there are very tangible benefits to using RFID tags as part of any supply chain optimisation process. The relatively low cost of the tags in real terms, is unfortunately more than offset by the significantly higher costs of the support technology, such as scanners, readers and interrogators and the other asset add-ons required to integrate the system into the value chain. Also, as this system generates a huge amount of instantaneous data, there has to be a means of collecting, collating and interpreting this information usefully and although it seems obvious to state, there is no point in collecting this data, unless it us used in an efficient and informative way, to give added value to to the entire process. Enterprise resource planning (developed from materials requirements planning) which involves the creation of a central repository for information, which uses software programmes to automate the various functions of an organisation, is one way that the data generated by RFID tag technology can be properly utilised.
Although the question of cost is an issue here, cutting edge technology, (hardware and software) is not cheap and such a modernisation programme will result in a considerable drain on company revenues, however this is the more traditional way of looking at it, in terms of ROI / ROV considerations. The long terms benefits to the value chain more that compensate for the short term costs involved. A recent study10 suggested that: “since the mid 1990’s popular consensus has held that businesses that invest in IT, are more productive and perform better than those that do not. . . . . “ A lot will depend on a company’s priorities, in terms of evaluating these areas and for instance, is the priority to have lean manufacturing, or is the priority to become more a DDSN (demand driven) supply network.
If the latter, then the technological considerations are not significant, as it has been said11 that the DDSN journey is not an IT project at all but rather: “. . is a journey that it 50% organisational, 40% process and 10 % technological. 11. . . . . .” In other words, this is essentially a strategic decision making process with some IT aspects to it, with the biggest difficulty to it’s implementation being the cultural aspects of the change.
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10. Digital Economy 2003. Economics and Statistics Administration, US Dept. of Commerce, December, 2003.
11. Recent meeting of top business executives at AMR Research Leadership Conference in Boston, on the 18th. November, 2005. Discussing the roadmap to DDSN.
Perhaps the most difficult aspect of implementing such a root and branch overhaul/modernisation of any existing logistics networks with a modern GEL solution is perhaps a cultural one, particularly when dealing with traditionally held ideas and concepts of a historical business model. Embarking on such a substantial programme of reform, to reflect the modern 21st. century global market place, with it’s attendant economical uncertainties and potential for political unrest, is a massive undertaking by any standard.
Retraining and upskilling of workforces is a prerequisite, followed by a phased introduction of the modernisation programme, is the only way forward as it must always be remembered that hand in hand with any modernisation process, with be the requirement to continue to do business and attend to the customer’s needs as well if not better than before.
People, perhaps the most important asset/resource a company has, will inevitably become discommoded and human difficulties will always arise and need to be considered, if such programmes of modernisation are to become fully successful. The importance and vitality of the human element to the value chain, should never be underestimated, I would submit.
5) Further recommendations.
The price/cost dynamic in economic terms is still the single most important consideration and particularly the case for companies that do business in the global market place. Whether PCM Corp. likes it or not, their main competitors are heavily involved in outsourcing and offshoring practices, where products are being made in developing countries which have significantly lower labour costs. Although opening production facilities in these developing countries is clearly an option to be considered, there are alternatives to this obvious option. It is the stated intention of PCM Corp. to preserve as many jobs as possible domestically within the USA and there are a number of strategic ways of dealing with the treat of low labour cost countries, while maintaining/increasing domestic production. Some of these strategies will now be examined further.
A. Automation
B. Outsourcing/strategic partnerships
C. Vertical Integration
D. Lean Manufacturing i) cutting lead time ii) improving quality iii) reducing costs
A) Automation.
For any capital intensive programme to add value to the value chain, volume is the key and in high volume situations, the option of automation is always available, when it is necessary to reduce high labour costs associated with some of PCM Corp’s products, in particular. A difficulty however is that high automation usually results in low flexibility and some of our products require the high flexibility that the high labour content facilitates.
Although this dilemma can usually be addressed by the use of computer integrated manufacturing processes, flexibility is more of a human resource which is usually dealt with by dividing workforces into core or periphery workers. Core workers constitute the primary labour market and provide flexibility through utilisation, who deliver functional flexibility by means or retraining and redeployment across multiple processes.
In high volume, low flexibility situations, automation is an option on at least 50% of the products that PCM Corp. manufactures. Automation will not resolve all issues within the manufacturing process supply chain in that some products can be sourced more cheaply that PCM Corp. can manufacture them and there is another option that can be utilised, to deal more effectively with this issue i.e. outsourcing.
B) Outsourcing
Low volume, high value added products lend themselves to the option of outsourcing and prevents high value company manufacturing assets being tied up, when they could be more productively employed on other processes within the supply chain. Sometimes, outsourcing is conducted by using strategic partnerships with competitors, particularly in manufacturing, but also in the financial/investment/banking sectors as well.
In manufacturing terms, the recent alliance between Ford, Volkswagen and Seat to jointly build a people carrier, is an example of such strategic partnerships between manufacturers who would otherwise be fierce competitors in a similar segment of a market. Outsourcing is usually less structured however and may simply consist of an order by one manufacturer for fully assembled engines to be supplied to a another manufacturer, for a particular model run or life cycle.
Very often, the hugh costs of developing/building a new engine, far outweigh the significantly lesser cost of buying a customer engine from another manufacturer, who has excess manufacturing capacity. The same principals could apply to PCM Corp. who could outsource certain low volume, high value added products from other suppliers, to address this issue of trying to compete with a product, that is significantly more expensive to produce in house, than a similar product supplied by it’s competitors.
C) vertical Integration.
It could be argued that vertical integration within a value chain is the “flip side” of the same outsourcing coin. As stated by Krajewski & Ritzman 12 that: “…the advantages of vertical integration are the disadvantages of more outsourcing…” Clearly, getting the strategic balance right between how much vertical integration and how much outsourcing a company does is vitally important.
Break even analysis and financial analysis will assist with this process of choice or how much of one or the other but the issue of strategic “fit” is the fundamental issue to any decision in this area. For instance, more vertical integration would be desirable if the goal is to enter foreign markets and is a very satisfactory way of gaining a foot hold in a foreign market place.
Usually though, a high level of vertical integration is desirable if volumes are high, with attendant economies of scale and greater efficiency. As stated by Krajewski and Ritzman13 paragraph 2 that: “. . . management must look up stream towards it’s suppliers and downstream towards it’s customers and bring in-house,those processes that give it the right core competencies….. those that allow the firm to organise work and deliver value better than it’s competitors. “ Historically, supplier partnerships were relied on to improve quality and cost however in today’s faster moving markets, the emphasis has shifted to customer driven innovation, speed and flexibility within the supply chain.
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12. Krajewski & Ritzman, Op. Management, (7th. ed.) Processes & Value Chains 2005, P110
13. See note 12.
D) Lean Manufacturing.
Lean manufacturing constantly tries to reduce or eliminate inefficiency and unproductive time and the elimination of non value added processes in the supply chain. Concepts such as JIT (just in time), “push” manufacturing, short lead times when combined with reduced levels of inventory, consistent quality, close supplier co operation, automation (as discussed above) are all features of a lean manufacturing process.
The process of improving or continued “tweaking” of the system to improve productivity and quality is what characterises the lean manufacturing approach.
The benefits of lean manufacturing to PCM Corp. are many and can be summarised as follows: 1. Reduced inventory levels prevent valuable company resources being tied up in raw materials and finished goods. 2. There is an associated saving in valuable asset space. 3. Reduced lead times. 4. Increased asset utilisation 5. Improvement in product quality 6. Streamlined IT processes. 7. Increased employee productivity Another value added benefit is that lean manufacturing systems are at their most simple and as such, are or should be highly adaptable to new situations, such as product mix and multiple product production.
Word Count 5,050
Useful Web URL’s for Research Purposes 1. WWW. Supply-Chain.com 2. WWW.hoovers.com 3. WWW.sap.com 4. WWW.ssaglobal.com 5. WWW.libopac.bolton.ac.uk:8000/ 6. WWW.amrresearch.com 7. WWW.cio.com/enterprise/erp/ 8. WWW.crm2day.com/erp