Technology Tip

When to Commit to an Enterprise Resource Planning System and Why

When to Commit to an Enterprise Resource Planning System and Why

All businesses run on a flow of information. Whether your deliverable is a product or a service certain information is common to all:

  • Client contact data
  • Product or service bought
  • Delivery Schedule
  • Availability of product or service
  • Delivery occurred (invoice released)
  • Payment received or moved to A/R

This is a sampling of the core data that must be gathered, entered, updated, disseminated and acted upon. For most businesses, the data has a department owner for the data. Contact information is usually owned by Sales, delivery dates are owned by Production, and so on. To illustrate by a simple example, if a customer has seen a reduction in demand they may want to adjust their receipts down from 10 items per month to five, for the next six months. Sales needs to send this information to production by re-writing the sales order. This affects purchasing which manages the warehouse, so they have to be notified and the projected order bookings needs to decrease. This information needs to be sent to Finance to update their monthly projections over the next six months. Spreading the news could be done by creating an email group called Change Order that goes to everybody that is affected by this change in information and the data can be manually updated.

For small businesses, this activity is often captured in the form of customized spreadsheets. Some companies even develop a set of custom template screens to be used by the various departments. At some point, as your company becomes more complex due to increasing sales, more complex product offerings, or other change it gets more complicated, time consuming, and costly to keep this information up-to-date. There is no exact trigger that says, "OK, it’s time to make a change to an Enterprise Resource Planning (ERP)", but there are a few telltale signs that time may be coming.

  • The percentage of on-time deliveries appears to be fluctuating or dropping below 95%
  • The amount of time that sales is spending writing change orders as a percentage of overall orders is increasing.
  • Backlog is increasing faster than shipments (not necessarily a bad thing - but a head’s up that your operation is going to need to get more efficient, or hire more people).
  • Profitability is dropping while your $/Unit or $/Order are not changing enough to explain the shortfall (you’re probably losing control of costs or having to buy at expediting pricing).

The purpose of an ERP, in a nutshell, is this: data is entered once into a master database. That data is extracted on-demand by the various departments. This greatly simplifies individual actions, reduces errors and improves throughput. You may be able to look at other indicators for your particular business, but once you start wondering if an ERP tool might help, it’s time to start looking around for a solution.

A Good Process for Choosing an ERP

There are a number of steps that need to be taken for a successful implementation of an ERP system. Often people pay less attention to the human factors than the technology factors and it is one of the easiest mistakes to make. A lack of communication, transparency, and involvement, will make any implementation much more difficult than it needs to be. So the first step is to get buy-in from both upper management and the user community. It is important to share the vision of what a fully implemented ERP will bring to the company. There is value in consolidating information into a central database creating "A single source of truth", that is always current. Each department can then extract that data to a number of custom templates to get only the information that they need.

As part of getting buy-in, it is important to have knowledgeable people to represent the interests of each functional department. For most companies this will be Sales, Operation, Logistics (Warehouse), Engineering, Purchasing and planning, Finance and Marketing. You would need one representative from each of these departments that can weigh-in on the decision making process.

The job of this team is to establish the business needs, functional needs, interactions with existing systems and develop a few candidate ERP systems that they would want to interview. In the interest of clarity, business needs are things like Profit and loss (P&L) statements and Balance sheets. Functional needs are things like entering orders, and verifying shipments. Often it helps for departments to flow chart their processes marking what data they need (inputs) and what data they provide to the organization (outputs). It’s not unusual to find either duplicates of data being sent or data that gets sent but doesn’t drive anything. These are opportunities to improve the system either now or at the implementation phase. Interacting with existing systems refers to input or output devices like bar code scanners, label printers, or special product marking requirements.

The team should quickly develop a sense of the scope of what needs to be covered and then research the available ERP systems. Part of the research should include talking to other companies that are about the same size and see if they have undergone an ERP conversion and what their takeaways were. It is also important to take into account whether to use a cloud-based system or to use your own servers. A goal should be at least three companies to interview about their ERP offer. This interview should be a conference, not a classroom. At the end of the process the objective is to estimate a budget for implementation. Don’t forget to include user training, whether implementation is done by in-house personnel or an outside contractor. Allow at least three months of customer support after "Go Live".

Keep in mind that during implementation, there may be a drop in efficiency. Most companies handle that by pre-building orders where possible. With a realistic budget and an estimate of the efficiencies and value, the team can present cost of ownership and ROI (Return on Investment), and a specific recommendation. You can move ahead with confidence knowing that the combined experience has informed the recommendations your team has developed.

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